An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst usesthe Capital Asset Pricing Model (CAPM). The following graph plots the current SML.Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by thisanalyst's prediction.Happy Corp.'s new required rate of return isTool tip: Mouse over the points on the graph to see their coordinates.REQUIRED RATE OF RETURN (Percent)1.21.62.00.8RISK (Beta)New SML?The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, thethe slope of the SML.Which of the following statements best describes the shape of the SML if investors were not at all risk averse?O The SML would be a horizontal line.O The SML would have a negative slope.O The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse.O The SML would have a positive slope, but the slope would be flatter than it would be if investors were risk averse.Grade It NowSave & ContinueContinue without savingB

The Capital Asset Pricing Model (CAPM) is used to determine the expected return on an investment…

Answered: An analyst believes that inflation is…

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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Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Step 1 Security market line (SML) is a graphical representation of how the approach of the capital asset pricing model (CAPM) operates. SML represents the combination of risk-free return, market return, and beta to depict the expected return of the security. CAPM is a financial approach that helps to determine the expected return of security by creating a relationship between the systematic risk associated with the security and returns of assets. Expected return on a stock is the…
Calculate the required rate of return for Clean Sweep Inc., assuming that (1) investors expect a 4.0% rate of inﬂation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the ﬁrm has a beta of 2.30, and (5) its realized rate of return has averaged 15.0% over the last 5 years. Do not round your intermediate calculations.
Investors expect a 2.0% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 6.0%. Isbell Enterprises has a beta of 1.1. Calculate the required rate of return for Isbell Enterprises. (Answer as a percent with 2 decimal places. For example, 10 percent should be entered as 10.00. Do not use the % sign.)
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 4.3% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 7.0%. Mudd has a beta of 1.2, and its realized rate of return has averaged 12.0% over the past 5 years. Round your answer to two decimal places.
You looked up the market risk return to be 12%. The risk-free rate of return is 2%, and General Motors has a beta of 1.2. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A. 12.4% B. 14.0% C. 10.4% D. 13.2%. Need typed answer only .Please give answer within 45 minutes
2 (CAPM and expected returns) a. Given the following holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market. b. If Zemin's beta is 0.83 and the risk-free rate is 9 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.) c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk? a. Given the holding-period returns shown in the table, the average monthly return for the Zemin Corporation is %. (Round to two decimal places.) The standard deviation for the Zemin Corporation is %. (Round to two decimal places.) Given the…
Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Select one: a. 8.80% b. 8.30% c. 9.38% d. 9.79% e. 8.38%
The Treasury bill rate is 4%, and the expected return on the market portfolio is 14%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.7 offers an expected return of 9.0%, does it have a positive or negative NPV? d. If the market expects a return of 12.0% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.) a. Market risk premium b. Return on investment % C. NPV d. Beta
Consider the following historical performance data for two different portfolios, the Standard and Poor's 500, and the 90-day T-bill presented below. What is the Fama diversification measure for the Globex Fund? Assume the T-bill rate as the risk- free rate and the S&P return as the market average return. Use at least four decimal places in your calculations, but report your answer in percentage terms rounded to two decimal places. (Ex..12345 should be entered as "12.35") Investment Vehicle Globex Fund World Fund S&P500 90-day T-bill Answer: Average Rate of Return% 25.2 13.92 15.52 7.10 Standard Deviation 21.33 14 12.8 0.3 Beta 1.05 0.95 R² 0.756 0.741
The Treasury bill rate is 6%, and the expected return on the market portfolio is 10%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.8 offers an expected return of 9.0%, does it have a positive or negative NPV? d. If the market expects a return of 11.0% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market risk premium |% a. b. Return on investment % с. NPV d. Beta
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.6% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 8.0%. Mudd has a beta of 1.5, and its realized rate of return has averaged 12.5% over the past 5 years. Round your answer to two decimal places.
What is the bond, bond valuation, and interest rates of CVS in 2020?

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