FIN 6307 HW 4

Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b)  Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)

Please DON'T use excel in solving this question.

Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) = 14%; βi = 1.0.b. Recalculate the required rate of return assuming βi is 1.8.

4. The following is a payoff table giving profits for various situations. Probability Alternative 1 Alternative 2 Alternative 3 Alternative 4 State 1 0.4 45 16 23 44 State 2 0.35 37 59 65 33 State 3 0.25 83 72 91 55 a) Using the expected monetary value (EMV), which alternative should be chosen? b) Set up the opportunity loss table and compute the minimum expected opportunity loss (EOL). c) What is the maximum value that you would be willing to pay to decide under certainty?

Refer to the following payoff table (values are profit):   State of Nature Alternative S1 S2 A1 75 −40 A2 0 100 Prior Probability 0.6 0.4 What is the expected payoff of the decision strategy  (i.e. using the EMV/EP criterion)?

6. On the basis of the utility formula below, which investment would you select if you were risk averse with A = 4? Standard Expected return E(t) deviation Investment 0.12 0.30 0.15 0.50 0.21 0.16 0.24 0.21

touch O 0 "|44% 17:08 20. Assume you have the following table. If you know that the Risk free rate (rf) is 6%, what is the reward to volatility (Sharpe Ratio)? Scenario Probability НPR Good 0.3 10% Average 0.5 9% Bad 0.2 -10% A) (6.44%) B) 7.5% C) 3.5% D) 6.2% E) None of the above This is a required question 21. Carson Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? * Economic Conditions Probability Return 22.00/

Analyze investment M and investment J using the below. Scenario Probability M Return J Return Strong .30 18% 20% Normal .30 15% 12% Weak .40 9% 5% 1. What is the range for M? 2. What is the average exp. return for M ? 3. What is the standard deviation* M? 3.85 (given) 4. What is the CV for M? 5. What is the range for J? 6. What is the average exp. return for J? 7. What is the standard deviation J? 6.22 (given) 8. What is the CV for J? 9. Which is the better choice?

Using the two graphs: a. What is the probability that investors will earn a return smaller than 10%?b. What is the probability that investors will earn nominal positive return?

F1

Complete steps thanks!

The SML implies​ that if you could find an investment with a negative​ beta, its expected return, E(k), would be: E(k) < 0 E(k) < k f 0 < E(k) < k f kF < E(k) < E(kM)

If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently.   Expected Return Beta A 20% 1.4 B 25% 1.2

M2

Answer question in the image.

The lowest rate of return possible is:a. 0%b. -∞c. -100%d. the company’s MARR

Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumptionlevels of 100 and are exposed to the following risk of loss: lose 10 with probability0.4 and lose 5 with probability 0.6. They are considering buying insurance to coverthese losses.  What is the certainty equivalent level of C when uninsured? (Hint: Findthe consumption level CEsuch that U(CE) equals the expected utility whenuninsured.)

a. Compute the expected rate of return on investment i given the following information: the market risk premium is 5%; Rf = 6%; βi = 1.2. b. Compute E(RM).