Capm | banking and finance
The Capital Asset Pricing Model (CAPM) is a widely used tool for estimating the return of an investment security, such as stocks and bonds. CAPM uses historical data to calculate the expected returns of a stock in relation to its risk and market conditions. The formula for CAPM is:
Expected Return = Risk-free Rate + Beta*(Market Risk Premium)
In this case, we can use the given information to calculate the future price of the stock at the end of the period using CAPM:
Expected Return = 5% + 0.45 (5%) = 7.25%
Future Price = 2.00 * (1+0.0725)^1 = RM2.15
Therefore, based on the above calculation, we can conclude that with an expected return rate of 7.25%, at the end of period, our hypothetical stock should be trading at around RM2.15 per share if it has a covariance with market portfolio with 0.45 and if other assumptions remain valid during this period like expected market return is 10%, variance 0f60% & risk premium being 5%.