10. The risk-free rate is 5%. Assume that investors are concerned about the mean and variance of a security, and that investors hold diversified portfolios of many assets, what is the value of stock A today? Stock A is a claim on a project with only one expected cash flow to equity of $1000 at the end of year 1. The market risk premium is expected to be 5%. Stock A is all-equity financed. The CAPM assumptions all hold. The beta of stock A is 1.5. a. $690.10 b. $698.20 C. $789.10 d. $864.70 e. $888.89

10. The risk-free rate is 5%. Assume that investors are concerned about the mean and variance of a security, and that investors hold diversified portfolios of many assets, what is the value of stock A today? Stock A is a claim on a project with only one expected cash flow to equity of $1000 at the end of year 1. The market risk premium is expected to be 5%. Stock A is all-equity financed. The CAPM assumptions all hold. The beta of stock A is 1.5. a. $690.10 b. $698.20 C. $789.10 d. $864.70 e. $888.89

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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Parts A-C have already been answered, looking for answer D.
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.
A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -
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.
d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%. e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.
Expected return
The risk-free rate is 4 per cent. The expected market rate of return is 12 per cent. If you actually expect Stock-X with a beta of 1.0 to offer a rate of return of 10 per cent, show (with calculations) whether this stock is over- or undervalued to you. Given your assessment, will you buy or sell short this stock? Do all calculation .Answer must be correct.
4
F1. The ordinary equity of MB Construction has a beta of 1.47 and an actual expected return of 15.26%. The risk-free rate of return is 4.3% and the market rate of return is 12.01%. Which one of the following statements is true given this information? (a) The actual expected return will graph above the Security Market Line (b) The equity is under-priced (c) The equity has less systematic risk than the overall market (d) The actual expected return indicates the equity is currently overpriced (e) Both (c) and (d) are correct. Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure? (a) M&M Proposition I (b) M&M Proposition II (c) Capital Asset Pricing Model (d) Law of one Price
In this problem we assume that the annual expected rate of return of the market portfolio is 22% and the annual risk-free rate is 2%. The standard deviation of the market portfolio returns is 22%. Assume the market is in equilibrium such that the Capital Asset Pricing Model (CAPM) holds: the market portfolio is efficient. If you have $1,000 to invest, how should you allocate it to achieve an annual expected return of 26%? Invest $260 in the risk-free asset and $740 in the market portfolio Invest $800 in the risk-free asset and $200 in the market portfolio Invest $1,200 in the risk-free asset and sell short $200 in the market portfolio Borrow $260 at the risk-free rate and invest $1,260 in the market portfolio Invest $200 in the risk-free asset and $800 in the market portfolio Borrow $200 at the risk-free rate and invest $1,200 in the market portfolio
You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information: Asset Stock A Stock B Stock C Risk-free asset What is the investment in Stock C? Investment Investment $300,000 $ 240,000 Investment Beta 0.70 1.10 1.50 What is the investment in risk-free asset?

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