At the beginning of 2007 Apples beta was 1.4 and the risk-free rate was about 4.5%.

QUESTION

At the beginning of 2007, Apples beta was 1.4 and the risk-free rate was about 4.5%. Apples price was $84.84. Apples price at the end of 2007 was 198.08. If you estimate the market risk premium to have been 6%, did Apples managers exceed their investors required return as given by the CAPM?
Required Return = Rf + Beta * Market Risk Premium Required Return = 4.5% + 1.4 * 6% Required Return = 12.90% Expected Return = (Closing Price Beginning Price) / Beginning Price Expected Return = ($198.08 $84.84) / $84.84 Expected Return

= 133.47% The expected return is greater than required return, therefore Apples managers exceed their investors required return as given by the CAPM.

ANSWER:

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