1. Suppose the risk free rate is 3%. The expected and the standard deviation of the return of the market portfolio are 10 % and 15%. Stock A has a standard deviation of return of 10%. The correlation coefficient between the returns of stock A and of the market is 0.6. A. What is the beta of stock A? B. According to CAPM, what is the expected return of stock A? C. If the actual expected return is 10%, is the stock over- or under-valued?

1. Suppose the risk free rate is 3%. The expected and the standard deviation of the return of the market portfolio are 10 % and 15%. Stock A has a standard deviation of return of 10%. The correlation coefficient between the returns of stock A and of the market is 0.6. A. What is the beta of stock A? B. According to CAPM, what is the expected return of stock A? C. If the actual expected return is 10%, is the stock over- or under-valued?

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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Company A has a beta of 0.9 , while Company B's beta is 1.4 . The market risk premium is 13.78 %, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: find the required returns on each stock and then subtract them.)
Stock A has a beta coefficient = 1.12. calculate the expected rate of return of the stock A given that the risk-free rate is 0.36 and the annual return is 0.12. give your answer in 0.000.
Stock A has an expected return of 12 percent and a standard deviation of 14 percent. Stock B has an expected return of 15 percent and a standard deviation of 16 percent. The correlation between them is 0.4. Portfolio Percentage in A Percentage in B 1 25 75 2 50 50 3 75 25 b) Calculate the expected return and the standard deviation for the minimium variance portfolio. c) If the risk-free rate is 8%, which one of the portfolios is the market portfolio according to the CAPM? (Which portfolio has the hightes Sharpe ratio?) D)Base on your calculations above, draw the portfolio frontier, indicate the effient portfolios, and add the Capital Allocation Line (CAL) (Capital Market Line (CML)).
Suppose the market portfolio has an expected return of 9% and a volatility of 18.5%. YMH stock return has a 22% volatility and a correlation with the market return of 0.74. If the risk-free rate is 1% and the CAPM holds, what is the Sharpe ratio of the YMH stock? O 0.32 0.384 O 0.2944 O 0.3648
Stock Y has a beta of 1.8 and an expected return of 18.2 percent. Stock Z has a beta of 8 and an expected return of 9.6 percent. If the risk-free rate is 5.2 percent and the market risk premium is 6.7 percent, the reward-to-risk ratios for Stocks Y and Z are percent, respectively. Since and the SML reward-to-risk is percent, Stock Y is and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
The risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is the required rate of return on the stock, E(Ri)? Use the CAPM equation.
14. Risk free asset, the market, and stock X have the expected returns of 2%, 8%, and 12% respectively. If X and the market has a covariance of 0.1503, what is the risk level of the market (as it is measured by the standard deviation)?
Finance The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Arethese stocks correctly priced? Why or why not? Use E(Ri) = Rf + βi(E(RM) − Rf).
Assume the CAPM holds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the market portfolio. The market portfolio's Sharpe ratio is 0.30 and the the risk-free rate is 5%. (a) What is Stock X's expected return? (b) What proportion of Stock X's return volatility (i.e. standard deviation) is priced by the market? Explain why this number is less than 1.
Suppose that the risk-free rate is 3% and the market risk premium is 8%. According to the CAPM,what is the required rate of return on a stock with a beta of 2?
Give typing answer with explanation and conclusion the expected return on stock A is 11.35%. the expected return on stock B is 8.7%. assuming CAPM holds, if the beta of stock A is higher than the beta of stock B by 0.17, what should the risk premium be?
Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM )is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%,and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%,and -10%, respectively. Compute the beta and expected return of portfolio 2.

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