Problem Set 3

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Agricultural Economics 330 Problem Set 3 Using the Capital Asset Pricing Model, compute the expected return for a stock with a Beta of 1.4, a market risk premium of 5%, and a risk free rate of 2%. Using the Capital Asset Pricing Model, compute the expected return for a stock with a Beta of 0.7, a market risk premium of 8.4%, and a risk free rate of 3%. Using the Capital Asset Pricing Model, compute the expected return for a stock with a Beta of 0, a market risk premium of 6%, and a risk free rate of 4% Using the Capital Asset Pricing Model, compute the risk free rate for a stock with a Beta of 2, a market risk premium of 4.5%, and an expected return of 11.5%

Using the Capital Asset Pricing Model, compute the Beta of a stock with an expected return of 5.19%, with the expected rate of market return of 6.5%, and a risk free rate of .9% Using the Capital Asset Pricing Model, compute the Beta for a stock with an expected return of 9.5%, a market return of 5%, and a risk free rate of 2.6% Write the VaR profile for an asset. The loss threshold being measured is 5%, and the asset has crossed that threshold 40 out of the past 200 days. Write the VaR profile for an asset. The loss threshold being measured is 10%, and the asset has crossed that threshold 3 out of the past 24 months.

Write the VaR profile for an asset. The loss threshold being measured is 6%, and the asset has crossed that threshold 2 out of the past 80 weeks. Write the VaR profile for an asset. The loss threshold being measured is $2500, and the asset has crossed that threshold 24 out of the past 400 days. Write the VaR profile for an asset. The loss threshold being measured is $1,000,000, and the asset has crossed that threshold 1 out of the past 36 months.

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Above is a PDF of past weekly returns for an index fund of energy stocks. 1. What portion of the index’s returns exceed 10% earnings? 2. What portion of the index’s returns are losses? 3. What is the one-week VaR profile for the index fund, given a loss threshold of 5%?

Written-Answer Questions: In your own words, write a few sentences for each question. There are no strictly “right” answers, so simply show your under standing of the material and credit will be given. When a business advertises that you can “lock - in” a certain rate on their product, be it a monthly streaming service like Netflix or a cell-phone bill, they are guaranteeing you a stable cost for a certain period of time. This allows you to accurately estimate how much it will cost over time. Some energy providers in the State of Texas give homeowners and renters this option, with the alternative having no locked-in rate, but a cheaper variable cost, that can go up and down depending on energy grid demand. This becomes a big deal when severe winter storms hit Texas and the cost of electricity spikes for days at a time. What do you think happens to each of the two groups of customers when that occurs, and what other products or services does this business model remind you of?

The Capital Asset Pricing Model is meant to estimate the expected return of a stock based on its risk profile relative to the greater market. That level of risk is accounted for by the stock’s Beta. A Beta of 1 means it tracks along with the market perfectly, so it’s no riskier or safer than the market on average. A Beta less than one means the stock is relatively less risky than the market, so adding it to your portfolio will reduce the portfolio’s overall risk. A Beta greater than one represents a relatively riskier stock, which is why it earns more in expected return, since it must be compensated for that additional risk. Using online financial research tools such as finviz or yahoo finance, find the Betas for these six stocks and tell me if each is more or less risky compared to the overall market. Meta, United Health Group, Wells Fargo, Texas Instruments, Ford, Procter and Gamble

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