What is the required rate of return using the capm model


Problem 1. Suppose your tax bracket is 20%. Would you prefer to earn a 8% taxable return or a 6% tax-free return? What is the equivalent taxable yield of the 6% tax-free return?

Problem 2. Suppose that HP is currently selling at $25 per share. You buy 500 shares using $7,500 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%. If the maintenance margin is 25%, how low can HP's price fall before you get a margin call?

a. What is the expected return of a stock given the following information:
State of    Probability    Return
Economy

Good       .1    15%
Normal    .6    13
Poor        .3    7

b. What is the standard deviation of returns?

Problem 3. A stock has a beta of 1.5, the risk free rate is 6% and the expected market return is 12%. What is the required rate of return using the CAPM model? If the expected return for the stock is 14.5%, would you recommend purchasing the shares now? Explain your answer in detail.

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Finance Basics: What is the required rate of return using the capm model
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