You are analyzing two assets: collectible LEGO sets, and stock of Apple. In the last 5 years, LEGOs have had an annual volatility of 5%, annual return of 6%, and a CAPM beta (the correlation coefficient between the asset and the market risk-premium) of 1.6. Apple has had an annual volatility of 10%, an annual return of 8%, and a CAPM beta of 1.2. Is the following statement true or false?

According to CAPM, Apple has a higher expected return than LEGO.

Answer:

No, Apple has lower rate of return than LEGOs.

Explanation:

Risk free rate is 2% and Market risk is 9%

Expected return can be calculated by :

E(r) = Rf + beta * (Rm - Rf)

E(r) LEGOs = 2 + 1.6 * (9 - 2)

E(r) LEGOs = 13.2%

E(r) Apple = 2 + 1.2 * (9 - 2)

E(r) Apple = 10.4%

You do not start saving money until age 46. On your 46th birthday you dutifully invest​ $10,000 each year until you finish your deposits when you reach the age of 65​ (you make the last deposit on your 65th​ birthday). The annual interest rate is 8​% that you earn on your deposits. Your brother starts saving​ $10,000 a year on his 36th birthday but stops making deposits after 10 years. He then withdraws the compounded sum when he reaches age 65. How much more money will your brother have than you at age​ 65?