11. Changesto the security market lineThe following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp.(HC).Based on the graph, complete the table that follows. (Tool tip: Mouse over the points in the graph to see their coordinates.)REQUIRED RATE OF RETURN (Percent)20.016.012.08.04.0ODo0.5■1.0RISK (Beta)1.52.0(?) CAPM ElementsRisk-free rate (TRF)Market risk premium (RPM)Happy Corp. stock's betaRequired rate of return on Happy Corp. stockAn analyst believes that inflation is going to increase by 2.40% 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 rectangle symbols to plot the new SML suggested by this analyst'sprediction. (Tool tip: Mouse over the points in the graph to see their coordinates.)Happy Corp.'s new required rate of return isREQUIRED RATE OF RETURN (Percent)201612co0of0.40.81.2ValueRISK (Beta)1.62.0New SML(?)

The capital asset pricing model aids analysts and investors in calculating the expected return on…

Answered: CAPM Elements Risk-free rate (TRF)…

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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Required: Using Table 5.3 as your guide, what is your estimate of the expected annual HPR on the market index stock portfolio if the current risk- free interest rate is 4.3% ? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. 0.120 Expected annual HPR TABLE 5.3 Risk and return of investments in major asset classes, 1927-2018 Average Risk premium Standard deviation max min T-bills 3.38 na 3.12 14.71 -0.02 T-bonds 5.83 2.45 11.59 41.68 -25.96 Stocks 11.72 8.34 20.05 57.35 -44.04
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% 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 1.7, and its realized rate of return has averaged 15.0% over the past 5 years. Round your answer to two decimal places.
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 33% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 4%. Calculate the utility levels of each portfolio for an investor with A = 2. Assume the utility function is U = E(r) Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Negative amounts should be indicated by a minus sign. - 0.5 × Ag². X Answer is complete but not entirely correct. WIndex U(A = 2) 0.0111 0.0504 0.0808 x 0.1026 0.1164 X 0.1200 X WBills 0.0 0.2 0.4 0.6 0.8 1.0 1.0 0.8 0.6 0.4 0.2 0.0
Data for Solo Corporation is shown below. Now Solo has acquired some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return? Hint: Use the Capital Asset Pricing model equation. Briefly discuss your result. Market Beta is 1.00Initial required return (rs) 10.20%The market risk premium, RPM 6.00%Percentage increase in beta 30.00%Increase in inflation premium, IP 2.00%
Calculate the required rate of return for Best Inc., assuming that (1) investors expect a 1.5% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 3.0%, (4) the firm has a beta of 1.2, and (5) its realized rate of return has averaged 10.0% over the last 5 years.
Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.
Solve step by step
Considering the attached set of securities and portfolio returns: Assume that you initially invested $1,000,000 in the portfolio and that the distribution of the annual rate of return of the portfolio is normal. What is the distribution of the return of the portfolio 20 years after its formation? Provide the graph of the distribution of the return of the portfolio.
Calculate the required rate of return for Williams Inc., assuming that (1) investors expect a 2.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 4.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. O 10.29% O 7.00% 09.0 O 12.00%
The following table indicates yearly returns for different asset classes in the past 10 years. Estimate the beta for the Nike stock. Note: Please write your answer in decimal form up to two decimal places. Nike Return Market Return Risk Free Rate 0.1 0.08 0.02 -0.1 -0.076 0.02 0.15 0.1 0.02 0.025 0.04 0.02 0.02 0.01 0.02 -0.12 -0.1 0.02 0.2 0.015 0.02 -0.03 -0.02 0.02 -0.3 -0.2 0.02 0.12 0.09 0.02

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