1) Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: a) What is the expected rate of return on the market portfolio? b) What would be the expected rate of return on a stock with a beta of 0? c) Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at .5. Is the stock overpriced or underpriced

1) Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: a) What is the expected rate of return on the market portfolio? b) What would be the expected rate of return on a stock with a beta of 0? c) Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at .5. Is the stock overpriced or underpriced

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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help me with part C please. thank you so much (a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655.
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.25 and an expected return of 15%. The other stock has an expected return of 21%. The total portfolio is equally as risky as the market (i.e.Bp=1). What is the beta for the other stock in your portfolio? What is the expected return of the risk-free asset? What is the expected return of the market? What is the expected return of your portfolio?
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Payoff Price Security A в State 1 State 2 PA = 2 Pg = 3 4 2 3 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.
Consider a firm with a beta of 1.57. If the market return is 6.73% and the risk-free rate is 0.90%, what is the firm's expected return according to the capital asset pricing model? Round your answer to four decimal places, e.g., enter 12.34 for 12.34%.
Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomco's required return? Use the capital asset pricing model (CAPM) to calculate Conglomco's required return.
3. Capital Asset Pricing Model A. Suppose you invest $400,000 in Treasury Bills that have a yield to maturity of 4% and $600,000 in the market portfolio with an expected return of 14%. What is the expected return on your portfolio? Please show and explain. B. Given the information in part (A), what is the required expected return for an investment in a stock that has a beta of 0.7? Please show and explain.
In an economy where the Capital Asset Pricing Model(CAPM) holds, the riskfree interest rate is 1%. The expected return of the market portfolio is 16% and its standard deviation is 20%. Suppose there is a portfolio with expected return of 25%. What should be its standard deviation? Select one: a.31.25% b.30% c.32% d. Insufficient information to determine the answer.
You want to construct a portfolio containing equal amounts of U.S. Treasury bills, stock A, and stock B. If the beta of the stock A is 0.87 and the beta of the portfolio is 0.92, what does the beta of stock B have to be?
Manipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.48 when the risk-free rate and market return are 8% and 13%, respectively. b. Find the risk-free rate for a firm with a required return of 14.684% and a beta of 1.47 when the market return is 12%. c. Find the market return for an asset with a required return of 12.040% and a beta of 0.95 when the risk-free rate is 5%. d. Find the beta for an asset with a required return of 13.312% when the risk-free rate and market return are 10% and 12.3%, respectively. C a. The required return for an asset with a beta of 1.48 when the risk-free rate and market return are 8% and 13%, respectively, is %. (Round to two decimal places.)
Total investment risk can be broken down into two types of risk. What are these two types of risk and which should NOT affect expected return? (b) A firm has a beta of 1.3. The expected market return is 12% and the risk-free rate is 2%. What should be the firm's equity cost of capital? Use CAPM
ANSWER C AND D PLEASE ONLY Consider the following portfolio choice problem. The investor has initial wealth w andutility u(x) = (x^n) / n. There is a safe asset (such as a US government bond) that has netreal return of zero. There is also a risky asset with a random net return that has onlytwo possible returns, R1 with probability 1 − q and R0 with probability q. We assumeR1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A isinvested in the safe asset.a) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?b) Find A as a function of w. c) Does the investor put more or less of his portfolio into the risky assetas his wealth increases? d) Now find the share of wealth, α, invested in the risky asset. How doesα change with wealth?
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank. The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.

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