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i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain! Step by step correct answer

What does the capital asset pricing model (CAPM) calculate?   a. The expected rate of return on an individual stock with respect to the risk-free rate of return b. The expected rate of return of an individual stock based on its overall risk c. The expected rate of return of an individual stock with respect to its market risk only d. The expected rate of return of an individual stock reflecting its financial risk Clear my choice

When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs.   a. true   b. false

Which statement is false regarding the Capital Asset Pricing Model?      A. The beta coefficient of a stock is constant.   B. The risk free rate is usually based on the treasury bill yield.   C. Market risk premium is the difference between market return and the risk free rate.   D. The cost of retained earnings is equal to the cost of new shares issued.

i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain!

Which of the following statements is true?   A.   Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares.   B.   All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases.   C.   Security market line (SML) plots return against total risk which is measured by the standard deviation of returns.   D.   Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.

How does the Arbitrage Pricing Theory (APT) differ from and complement the Capital Asset Pricing Model (CAPM)? The Arbitrage Pricing Theory, developed by Stephen Ross, proposes that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic factors. Unlike CAPM, which uses a single factor (market risk), APT allows for multiple factors to explain asset returns, potentially providing a more comprehensive risk-return framework. These factors might include inflation, GDP growth, interest rates, or market indices. APT is based on the principle that arbitrage opportunities will be eliminated in efficient markets, leading to a pricing equilibrium. While more flexible than CAPM, APT faces challenges in identifying and measuring relevant factors. The theory has important implications for portfolio management, asset valuation, and our understanding of risk premiums in financial markets.

Which of the following is needed to calculate a firm’s WACC?    A. the cost of carrying inventory    B. the amount of capital necessary to make the investment    C. the cost of preferred stock    D. the probability distribution of expected returns E. both b and c

Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return on assets b. Expected market return c. Risk-free rate of return d. The company's beta

Duration is important in understanding a fixed income portfolio because A. it is used in the capital asset pricing model B. it measures the interest rate sensitivity of a bonds value C. It measures the correlation with a bank's stock price D. It causes contagion

1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.

Subject  :- Finance

In a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free rate

he concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security—such as a share of a particular corporation’s common stock—should be (equal to or more than)     the present value estimate of the firm’s expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock).   Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to “beat” the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis…

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according to capm the expected return on equity includes a reward for: a. market risk and specific risk b. Specific risk only c. Time value of money and market risk  d. Diversification and portfolio risk  e. Time value of money and specific risk

Which statement is correct, all else held constant? A. If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. B. The aftertax cost of debt increases when the market price of a bond increases. C. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. D. Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.

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a.Distinguish between systematic and unsystematic risk and explain the significance of the distinction portfolio analysis  b. Describe the assumption in CAPM analysis that corporate debt as a zero beta value  c. Based on both the CAPM and Modigliani- Miller proposition (11), explain the support of relevant equations, how changes in the debt equity ratio can change a firm's equity beta

An efficient capital market is best defined as a market in which security prices reflect which one of the following?   Multiple Choice A  Current inflation B  A risk premium C  All available information D  The historical arithmetic rate of return E  The historical geometric rate of return

In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.