**Investment Risk Analysis: Misestimating Firm's Beta**Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. You plan to buy a firm with an expected perpetual cash flow of $1,000 but are unsure about its risk. If you believe the beta of the firm is 0.7, whereas the actual beta is 1.4, you need to calculate how much more you are offering for the firm than its true worth. *(Do not round intermediate calculations. Round your answer to 2 decimal places.)***Input Field:**- **Amount offered in excess** (input box for value)

As per CAPM Ri = Rf + B (Rm - Rf) Where Ri = Return on equity Rf = Risk free rate of return B =…

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.7, when in fact the beta is really 1.4, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.7, when in fact the beta is really 1.4, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2

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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Dhofar Energy Services has a Beta = 1.04 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2007 b. 0.2088 c. 0.2402 d. All the given choices are not correct e. 1.1567
1
You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9% Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]
Southern Imports is an all-equity firm with a beta of 1.23. The firm is considering a new project that entails less risk than its current operations and thus management feels that the firm's beta should be lowered by .18 when assigning a discount rate to this project. The expected return on the market portfolio is 9.4 percent and the risk-free rate is 2.8 percent. What discount rate should be assigned to this project? 9.73% 9.34% 10.32% O 11.46%
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.
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 5%, the expected return on the first factor (r₁) is 14%, and the expected return on the second factor (r2) is 8%. If bil 0.5 and bi2 = 0.8, what is Crisp's required return? Do not round intermediate calculations. Round your answer to one decimal place. % =
You are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693
You want to estimate the cost of equity of firm A using CAPM. Firm A has a beta of 1.3. Assume that the return on the market portfolio is 8.52%, and the risk-free rate is 3%. What is the cost of equity of firm A? Group of answer choices There is not enough information to answer this question. 10.17% 11.74% 14.21% 12.11%
Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 46%. Portfolios A and B are both well diversified. Portfolio A Beta on M₁ 1.5 2.0 Beta on My 2.1 -0.6 Required: What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(rp) = Expected Return (%) 36 14 45 60 Answer is not complete. Bp1 Bp2
The expected return for the investment is ??? The standard deviation is ??? While the expected return for the risk-free assets, Treasury Bills, is ??? The standard deviation is ???
You are managing a pension fund with a value of $360 million and a beta of 1.30. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many contracts do you need if the delta of the call option is 0.64 and the S&P index is currently at 3, 300 ? Note: Do not round intermediate calculations. A negative value should be indicated by a minus sign. Round your answer to the nearest whole number.
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.

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