A firm's stock has a market capitalization of 120 million and an equity beta of 0.75. Bonds issued by the firm have a yield rate of 7.7%. Bonds with a similar debt rating has a default rate of 2.7% and a loss rate of 45%. The total market value of the firm's bonds is 80 million. The risk free rate is 1.5% and the market risk premium is 7.8%. The volatility of the market portfolio is 22%. Suppose that the CAPM assumptions hold. Calculate the covariance between the return of the firm's assets and the return of the market portfolio. 0.0260 0.0287 0.0342 0.0314 0.0232

MATLAB: An Introduction with Applications
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D4)
A firm's stock has a market
capitalization of 120 million and an
equity beta of 0.75. Bonds issued by
the firm have a yield rate of 7.7%.
Bonds with a similar debt rating has
a default rate of 2.7% and a loss
rate of 45%. The total market value
of the firm's bonds is 80 million. The
risk free rate is 1.5% and the market
risk premium is 7.8%. The volatility
of the market portfolio is 22%.
Suppose that the CAPM
assumptions hold. Calculate the
covariance between the return of
the firm's assets and the return of
the market portfolio.
0.0260
0.0287
0.0342
0.0314
0.0232
Transcribed Image Text:A firm's stock has a market capitalization of 120 million and an equity beta of 0.75. Bonds issued by the firm have a yield rate of 7.7%. Bonds with a similar debt rating has a default rate of 2.7% and a loss rate of 45%. The total market value of the firm's bonds is 80 million. The risk free rate is 1.5% and the market risk premium is 7.8%. The volatility of the market portfolio is 22%. Suppose that the CAPM assumptions hold. Calculate the covariance between the return of the firm's assets and the return of the market portfolio. 0.0260 0.0287 0.0342 0.0314 0.0232
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