Using capm to compute expected return


Please find an estimate of beta for British Petroleum (BP). Please consider examining or using an industry average beta, especially if the reported beta you find seems unrealistic or inappropriate.

Note: You should probably check the beta across a few different sources, because sometimes they vary. Please find the current interest rate (yield) for 3-month treasury bills. Determine an appropriate market risk premium. Please also consider the size of BP when estimating an appropriate premium.

Questions:

After making the calculations:

1. Using all this information, what is the expected return for BP using CAPM?

2. Last week I estimated a required rate of return of 10% for BP using the dividend discount model. How does the CAPM number compare?

Please write up a 1-page summary of your findings, including any calculations you might have made.

 

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Finance Basics: Using capm to compute expected return
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