Click the icon to see the Worked Solution. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.) The required return for investment C is %. (Round to one decimal place.) The required return for investment D is %. (Round to one decimal place.) The required return for investment E is %. (Round to one decimal place.) 7: Data Table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security Beta A 1.34 в 0.93 0.13 D 0.96 E 0.67
Click the icon to see the Worked Solution. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.) The required return for investment C is %. (Round to one decimal place.) The required return for investment D is %. (Round to one decimal place.) The required return for investment E is %. (Round to one decimal place.) 7: Data Table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security Beta A 1.34 в 0.93 0.13 D 0.96 E 0.67
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
Related questions
Question
![### Understanding Required Return Using CAPM
To calculate the required return for each security, we use the Capital Asset Pricing Model (CAPM). The formula for CAPM is:
\[ \text{Required Return} = \text{Risk-Free Rate} + \beta \times (\text{Expected Return on Market} - \text{Risk-Free Rate}) \]
Given:
- **Risk-Free Rate**: 6.7%
- **Expected Return on the Market Portfolio**: 7.8%
Let's find the required return for each investment based on their beta values.
#### Calculations:
1. **Required Return for Investment A**
- **Beta (β)**: 1.34
- Formula Application:
\[ \text{Required Return} = 6.7\% + 1.34 \times (7.8\% - 6.7\%) \]
2. **Required Return for Investment B**
- **Beta (β)**: 0.93
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.93 \times (7.8\% - 6.7\%) \]
3. **Required Return for Investment C**
- **Beta (β)**: 0.13
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.13 \times (7.8\% - 6.7\%) \]
4. **Required Return for Investment D**
- **Beta (β)**: 0.96
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.96 \times (7.8\% - 6.7\%) \]
5. **Required Return for Investment E**
- **Beta (β)**: 0.67
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.67 \times (7.8\% - 6.7\%) \]
### Data Table
| Security | Beta |
|----------|-------|
| A | 1.34 |
| B | 0.93 |
| C | 0.13 |
| D |](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F08623862-8300-4109-b90e-45024753dff6%2F3cfda1d2-ea6c-4100-a9d5-e8def5b92325%2Fpf4x6he_processed.png&w=3840&q=75)
Transcribed Image Text:### Understanding Required Return Using CAPM
To calculate the required return for each security, we use the Capital Asset Pricing Model (CAPM). The formula for CAPM is:
\[ \text{Required Return} = \text{Risk-Free Rate} + \beta \times (\text{Expected Return on Market} - \text{Risk-Free Rate}) \]
Given:
- **Risk-Free Rate**: 6.7%
- **Expected Return on the Market Portfolio**: 7.8%
Let's find the required return for each investment based on their beta values.
#### Calculations:
1. **Required Return for Investment A**
- **Beta (β)**: 1.34
- Formula Application:
\[ \text{Required Return} = 6.7\% + 1.34 \times (7.8\% - 6.7\%) \]
2. **Required Return for Investment B**
- **Beta (β)**: 0.93
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.93 \times (7.8\% - 6.7\%) \]
3. **Required Return for Investment C**
- **Beta (β)**: 0.13
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.13 \times (7.8\% - 6.7\%) \]
4. **Required Return for Investment D**
- **Beta (β)**: 0.96
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.96 \times (7.8\% - 6.7\%) \]
5. **Required Return for Investment E**
- **Beta (β)**: 0.67
- Formula Application:
\[ \text{Required Return} = 6.7\% + 0.67 \times (7.8\% - 6.7\%) \]
### Data Table
| Security | Beta |
|----------|-------|
| A | 1.34 |
| B | 0.93 |
| C | 0.13 |
| D |
Expert Solution
Step 1
Capital Asset Pricing Model (CAPM):
This model attempts to explain the relationship between the systematic risk and the expected return of the asset. It is generally used to determine the price and the expected return of the risky securities.
Step 2
Compute the required return for investment A using the equation as shown below:
Hence, the required return is 8.17%.
Step 3
Compute the required return for investment B using the equation as shown below:
Hence, the required return is 7.72%.
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