(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 0.5 percent and the expected return for the market is 8 percent. Stock K Beta 1.11 G B U 1.29 0.85 0.98 (Click on the icon in order to copy its contents into a spreadsheet) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 2 percent and the market risk premium were to be only 7 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. a. The expected rate of return for security K, which has a beta of 1.11, is %. (Round to two decimal places.) The expected rate of return for security G, which has a beta of 1.29, is The expected rate of return for security B, which has a beta of 0.85, is The expected rate of return for security U, which has a beta of 0.98, is %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) b. If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security K is %. (Round to two decimal places.) If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security G is If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security B is If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security U is c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? Which market risk premium scenario (from part a or b) best fits a period of economic expansion? %. (Round to two decimal places.) (Select from the drop-down menu.) (Select from the drop-down menu.) Part b Parta
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 0.5 percent and the expected return for the market is 8 percent. Stock K Beta 1.11 G B U 1.29 0.85 0.98 (Click on the icon in order to copy its contents into a spreadsheet) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 2 percent and the market risk premium were to be only 7 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. a. The expected rate of return for security K, which has a beta of 1.11, is %. (Round to two decimal places.) The expected rate of return for security G, which has a beta of 1.29, is The expected rate of return for security B, which has a beta of 0.85, is The expected rate of return for security U, which has a beta of 0.98, is %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.) b. If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security K is %. (Round to two decimal places.) If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security G is If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security B is If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security U is c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? Which market risk premium scenario (from part a or b) best fits a period of economic expansion? %. (Round to two decimal places.) (Select from the drop-down menu.) (Select from the drop-down menu.) Part b Parta
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
quiz 8-17
Transcribed Image Text:(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 0.5 percent and the expected return for the market is 8 percent.
Stock
K
Beta
1.11
G
B
U
1.29
0.85
0.98
(Click on the icon in order to copy its contents into a spreadsheet)
a. Using the CAPM, what rates of return should Grace require for each individual security?
b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 2 percent and the market risk premium were to be only 7 percent?
c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.
a. The expected rate of return for security K, which has a beta of 1.11, is %. (Round to two decimal places.)
The expected rate of return for security G, which has a beta of 1.29, is
The expected rate of return for security B, which has a beta of 0.85, is
The expected rate of return for security U, which has a beta of 0.98, is
%. (Round to two decimal places.)
%.
(Round to two decimal places.)
%. (Round to two decimal places.)
%. (Round to two decimal places.)
%. (Round to two decimal places.)
b. If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security K is %. (Round to two decimal places.)
If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security G is
If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security B is
If the risk-free rate were to rise to 2% and the market risk premium were to be only 7%, the expected rate of return for security U is
c. Which market risk premium scenario (from part a or b) best fits a recessionary environment?
Which market risk premium scenario (from part a or b) best fits a period of economic expansion?
%. (Round to two decimal places.)
(Select from the drop-down menu.)
(Select from the drop-down menu.)
Part b
Parta
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