Mr. Raman, a portfolio manager, is analyzing a set of securities using the Capital Asset Pricing Model (CAPM). He has gathered the following…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2026
Mr. Raman, a portfolio manager, is analyzing a set of securities using the Capital Asset Pricing Model (CAPM). He has gathered the following information: Security Beta CAPM Return A Ltd 1.2 15.20% B Ltd 0.8 12.80% C Ltd 1.1 ? Cash in hand ? Nil Treasury Bill ? ? Stock Market i.e. Nifty ? ? (i) Complete the above table with all missing values. (ii) CAPM explains the relationship between systematic risk and expected return on a security. DISCUSS the nature of the relationship between Beta and expected return under CAPM.

Suggested Answer and Working Notes:

(i) According to CAPM R s = R f + Beta x R p 15.20 = R f + 1.2R p .....(1)12.80 = R f + 0.8R p .....(2)By solving, 0.4R p = 2.4.So Risk Premium = 6% Substituting in Eqn. 1 15.20 = R f + 1.2*6%R f = 15.20 - 7.20 = 8%Hence, Risk Free Return = 8%R p = R m - R f 6 = R m - 8%R m = 14%R s (C Ltd.) = 8% + 1.1 x 6% = 14.6% Security Beta CAPM Return A Ltd 1.2 15.20% B Ltd 0.8 12.80% C Ltd 1.1 14.60% Cash in hand 0 Nil Treasury Bill 0 8.00% Stock Market (Nifty) 1 14.00% (ii) Risk-averse investors may prefer securities with low Beta (<1) i.e. B Ltd. Aggressive investors may choose high Beta (>1) securities for higher potential returns i.e. A or C Ltd.

Topics: Part-A: Financial Management

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