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Capital Asset Pricing Model (CAPM) Web Exercise In this web exercise, we will show how to determine the required rate of return for a stock using the...

Capital Asset Pricing Model (CAPM) Web ExerciseIn this web exercise, we will show how to determine the required rate of returnfor a stock using the capital asset pricing model.In the response, be sure to include your calculations for each one of the organizations listed in Step 9 of the exercise. Im not very good with math and so please show step by step how you obtain the answers. 1. The formula for the capital asset pricing model is:Ki _ RF _ bi (KM _ RF ) (217)Ki is the required rate of return that we are solving for; RF is the risk-freerate, and we shall assume it is 4.6 percent; bi is the systematic risk of a stockthat we will estimate; (KM _ RF ) is the equity risk premium or the amount themarket is assumed to earn over the risk-free rate in the long term. We will use6.4 percent in this example.2. Now we are in a position to estimate the beta for a company and compute Ki,the required rate of return. While Value Line, Bloomberg, and other financial services provide estimates of beta, they are often very different. In this exercise, we are going tohave you eyeball a value for beta. Go to finance.yahoo.com .3. Enter Oracle (ORCL) in the Enter System box and click Go.4. Along the left margin, click on Basic Chart.5. Then on the Range line, click on 2y.6. Then on the Compare line, select S&P and click Compare.7. Eyeball the relative volatility of ORCL to the Standard and Poor Index (GSPC)and estimate a beta (such as 1.1 or 1.3) based on the relative volatility of thestock versus the index.8. Use this beta and the previously presented information on RF and (KM _ RF ) tocompute Ki.9. Follow this procedure for:a. McDonalds (MCD)b. Bank of America (BAC)c. Coca-Cola (KO)10. What conclusion can you draw between the relationship of beta (bi ), a riskmeasure, and the required rate of return (Ki )?

SOLUTION OF THE QUESTIONANSWER aGIVEN :RF :(KM-RF) : 4.60%6.40% FOR Mcdonalds (MCD )Beta (bi) : 0.65 ki = RF + bi(KM - RF )ki =4.6 + .65 * 6.4=8.76%b) FOR Bank of America (BAC)Beta (bi...
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