As an equity analyst, you have developed the following return forecastsand risk estimates for two different stock mutual funds (Fund T and Fund U):Forecasted Return CAPM BetaFund T9.00%1.20Fund U10.00%0.80f the risk-free rate (RFR) is 3.9% and the expected market risk premium (i.e.,E(Ra) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the3.а.САРМ.

Financial statements are statements which states the business activities performed by the company .…

As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Forecasted Return CAPM Beta Fund T 9.00% 1.20 Fund U 10.00% 0.80 the risk-free rate (RFR) is 3.9% and the expected market risk premium (ie., E(Ra) – RFR) is 6.1%, calculate the expected retun for each mutual fund according to the 3.a. CAPM.

As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Forecasted Return CAPM Beta Fund T 9.00% 1.20 Fund U 10.00% 0.80 the risk-free rate (RFR) is 3.9% and the expected market risk premium (ie., E(Ra) – RFR) is 6.1%, calculate the expected retun for each mutual fund according to the 3.a. CAPM.

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

See similar textbooks

Related questions

Q: Consider the following information about two stocks (D and E) and two common risk factors (1 and 2)…

A: Fama-French factor models are financial models used to explain and predict stock returns based on…

Q: QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium…

A: Since you have posted multiple questions, we will provide the solution only to the first question as…

Q: (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common…

A: Expected return of stock is computed as follows:-Expected return of stock = whereRi= return Pi =…

Q: Consider a portfolio consisting of the following three stocks: The volatility of the market…

A: By using the CAPM approach, the expected return of the stock is calculated. A portfolio consists of…

Q: (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common…

A: Probability of state of EconomyStock A's Return0.210%0.617%0.220%Probability of state of…

Q: Suppose the market risk premium is 9 % and also that the standard deviation of returns on the market…

A: Expected rate of return is the minimum return that a shareholder requires on the investment made in…

Q: Assume the following data for a stock: Risk - free rate market) == 1.5; beta (size) = 0.3; beta…

A: To calculate the expected return on the stock using the Fama-French three-factor model, we need to…

Q: Consider the following simplified APT model: Factor Market Expected Risk Premium (%) Interest rate…

A: FactorExpected risk premiumMarket6.20%Interest rate-0.80%Yield spread4.80%MarketInterest rateYield…

Q: Stock Y has a beta of 0.9 and an expected return of 12.6 percent. Stock Z has a beta of 6 and an…

A: A graphical representation of CAPM (capital asset pricing model) is termed as SML (security market…

Q: Consider following information on a risky portfolio, risk-free asset and the market index. What is…

A: A portfolio with all the characteristics has been provided. Capital market information are also…

Q: (Expected rate of return and risk) Syndex, Inc is considering an investment in one of two common…

A: Risk and return are essential financial principles. The term “risk” refers to the uncertainty and…

Q: Consider the following information about three stocks: State of Economy Probability of State of…

A: Weights:Stock A: 40%Stock B: 40%Stock C: 20%

Q: Using the spreadsheet answer question (c) please

A: Given, Volatility of the market = 10% Expected Return = 8% Risk-free rate = 3%

Q: Suppose you manage an equity fund with the following securities. Use the following data to calculate…

A: AlphaResidual standard deviationVogt0.0120.117Isher0.0060.048Hedrock0.0160.113

Q: Questions: a. Compute the expected return for stock X and for stock Y b. Compute the standard…

A: Expected returns refer to a profit or loss that is attained by the investor over the investment. It…

Q: Find risk free rate and expected return of market portfolio based on the following information -…

A: Expected return (CAPM) = Rf+β*Rp.Rf = Risk free rate.Rp = Risk premium.

Q: You are putting together a portfolio made up of four different stocks. However, you are considering…

Q: You plan to invest in either a mutual fund X or mutual fund Y. The following information about the…

A: Two asset portfolio expected return: The anticipated return on an investment is the value assigned…

Q: The following questions are related to modern portfolio theory. • Assume there are only two stocks…

A: 1. Expected return of portfolio comprising of two risky assets or stocks is computed by following…

Q: An investor plans to invest funds in the following stocks: Stock Beta Amount Invested A 1.39…

A: Beta of an asset measures the sensitivity of the asset in relation to the change in the market…

Q: After learning the course, you divide your portfolio into three equal parts (i.e., equal market…

A: So, the beta of your overall portfolio is approximately 0.573.

Q: What is the required rate of return for Stock X based on the capital asset pricing model (CAPM)?

A: Required Rate of Return for Stock: It is a minimum acceptable rate of return for equity investors…

Q: Finance The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent.…

A: If expected return is more than required return then security is undervalued. If required return is…

Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

As an equity analyst, you have developed the following return forecasts
and risk estimates for two different stock mutual funds (Fund T and Fund U):
Forecasted Return CAPM Beta
Fund T
9.00%
1.20
Fund U
10.00%
0.80
f the risk-free rate (RFR) is 3.9% and the expected market risk premium (i.e.,
E(Ra) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the
3.а.
САРМ.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Consider a portfolio consisting of the following three stocks: an expected return of 8%. The risk-free rate is 3%. a. Compute the beta and expected return of each stock. ▪ The volatility of the market portfolio is 10% and it has b. Using your answer from part a, calculate the expected return of the portfolio. c. What is the beta of the portfolio? d. Using your answer from part c, calculate the expected return of the portfolio and verify that it matches your answer to part b.
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Stock Expected Return Standard Deviation A 8% 55% B 4% 45% Correlation = −1 Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a “synthetic” risk-free asset?) (Round your answer to 2 decimal places.) b. Could the equilibrium rƒ be greater than rate of return?
You are facing three stock investment alternatives, Stock A, Stock B and Stock C. Given the following information, please indicate which stock is (are) overvalued, which stock is (are) undervalued, and which stock is (are) correctly priced based on the required returns calculation using the Capital Asset Pricing Model (CAPM or Security Market Line=SML). The risk free rate is 3% and the risk premium for the market index return is 5%. Please Show Work Expected Stocks Returns BETA A 14% 1.2 B 8% 0.67 C 20% 2.5
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Portfolio Y Z Market Risk-free Rp 16.00% бр 32.00% 15.00 27.00 7.30 17.00 11.30 5.80 22.00 0 Bp 1.90 1.25 0.75 1.00 0 Assume that the tracking error of Portfolio X is 13.40 percent. What is the information ratio for Portfolio X? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places. Information ratio
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information: Stock A Beta 1.33 Expected Return 12% Stock B Beta 0.7 Expected Return 10% (a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words] (b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively. (please show me steps and round the final answer to 2 decimal places, thanks)
Thank you
After learning the course, you divide your portfolio into three equal parts (i.e., equal market value weights), with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 1.11. What is the beta of your overall portfolio?
A second version of the Markowitz portfolio model maximizes expected return subject to a constraint that the variance of the portfolio must be less than or equal to some specified amount. Consider the Hauck Financial Service data. Click on the datafile logo to reference the data. Annual Return (%) Mutual Fund Year 1 Year 2 Year 3 Year 4 Year 5 Foreign Stock 10.06 13.12 13.47 45.42 -21.93 Intermediate-Term Bond 17.64 3.25 7.51 -1.33 7.36 Large-Cap Growth 32.41 18.71 33.28 41.46 -23.26 Large-Cap Value 32.36 20.61 12.93 7.06 -5.37 Small-Cap Growth 33.44 19.40 3.85 58.68 -9.02 Small-Cap Value 24.56 25.32 -6.70 5.43 17.31 (a) Construct this version of the Markowitz model for a maximum variance of 38. Let: FS = proportion of portfolio invested in the foreign stock mutual fund IB = proportion of portfolio invested in the intermediate-term bond fund LG = proportion of portfolio invested in the large-cap growth fund LV = proportion of portfolio invested in the large-cap value fund SG =…
Consider following information on a risky portfolio, risk-free asset and the market index. What is the Sharpe ratio of the market index? Risky portfolio Risk-free asset Market index Average return 8.2% 2% 6% Std. Dev. 26% 20% Residual std. dev. 10% Alpha 1.4% Beta 1.2
Use the expected return-beta equation from the CAPM. What is the expected return for a stock if the risk-free rate is 4%, beta 0.9 and the expected return for the market portfolio is 6%? What is the risk-free rate if beta is 1.1, the expected return 6.3% and the expected return for the market portfolio is 6%? What is beta if the risk-free rate is 4%, the expected return 11% and the expected return for the market is 6%? What is the expected return for the market if the risk-free rate is 4%, beta 0.9 and the expected return 11%?
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) ew an example Get more help. T 3 a. Given the information in the table, the expected rate of retum for stock A is 15.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.) E D 80 73 Return. 12% 16% 18% U с $ 4 R F 288 F4 V Common Stock B % 5 T FS G 6 Return -7% 7% 13% 21% B MacBook Air 2 F& Y H & 7 N 44 F? U J ** 8 M | MOSISO ( 9 K DD O . Clear all : ; y 4 FIX { option [ + = ? 1 Check answer . FV2 } ◄ 1 delete 1 return shift
A portfolio analyst has been asked to allocate investment funds among three different stocks. The relevant data for the stocks is shown in the following table. If the goal is to maximize return while maintaining risk within acceptable bounds (in this case, a portfolio standard deviation of no more than 20%), find the proper allocation of the funds to each stock. Return Risk (Standard Deviation Stock (R) A 20% to S) 25% Pair of Stocks Joint Risk (Covariance) A to B 0.05 B 10% 12% A to C 0.075 C 15% 10% B to C -0.05 ces What proportion of the portfolio should be allocated to stock]B?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS