Consider the following hypothetical firms with their respective beta ABC- 1 MNO- 0 QRS- 1.2 XYZ- 0.85 i. Which firm has the highest risk?ii. Which firm is risk free?iii. Which firm’s returns will be equal to the market returns?

Consider the following hypothetical firms with their respective beta ABC- 1 MNO- 0 QRS- 1.2 XYZ- 0.85 i. Which firm has the highest risk?ii. Which firm is risk free?iii. Which firm’s returns will be equal to the market returns?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 11MC

See similar textbooks

Related questions

Q: You observe the following: ABC Inc. has 1.8 Beta and .2 Expected return XYZ Inc has 1.6 Beta and .19…

Q: #2 #3 #4 00 #1

A: We need to determine the Utility of each of the Investment by inputting the values. Then we can…

Q: 1. A security has an expected rate of return of 0.11 and has a beta (B) of 1.5. The risk-free rate…

A: 1) Expected return = 11% Beta = 1.5 Risk free rate (Rf) = 5% Market return (Rm) = 9%

Q: In the single-index model represented by the equation ri = E(ri) + βiF + ei, the term ei represents…

A: ei

Q: Suppose you observe the following situation: Security Beta Expected…

A: Select information are available about the two stocks. We have to find out the market return and…

Q: Which of the following statements about the Security Market Line are correct? I. The intercept point…

A: Security Market is a simple concept. It is the graphical representation of the Capital Asset Pricing…

Q: Long-Term Financing Needed At year-end 2018, Wallace Landscaping's total assets were $1.91 million,…

A: a. Total assets = $1.91 millionAccounts payable = $525,000Common stock = $530,000Retained earnings =…

Q: What is the correlation coefficient between returns on any efficient portfolio and returns on the…

A: Efficient portfolio is a type of portfolio which has eliminated all the non-systematic risk in the…

Q: In the capital asset pricing model, the expected return on an asset with a beta equall to zero would…

A: Solution:-Capital Asset Pricing Model (CAPM) is a model which gives a formula to calculate the…

Q: Suppose you observe the following situation on two securities: Security Beta Expected…

A: Given: Security Beta Expected Return Pete Corp. 0.8 0.12 Repete Corp. 1.1 0.16

Q: An efficient capital market is best defined as a market in which security prices reflect which one…

A: Efficient Capital Market: It is the market where all available information is reflected in asset…

Q: Use the required return-beta equation from the CAPM What is the required return if the risk-free…

A: The Capital Asset Pricing Model (CAPM) measures the relationship between the return and the risk of…

Q: The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model,…

A: The CAPM formula is used to calculate the expected returns of an asset. It is based on the idea of…

Q: onsider the following information (Assume that Security M and Security N are in the same financial…

A: Expected return is calculated by using CAPM equation. CAPM measures systematic risk Expected return…

Q: Consider an economy with just two assets. The details of these are given below. Number of Shares…

A: Number of shares of A = 100 Number of shares of B = 150 Price of A = 1.5 Price of B = 2 The expected…

Q: Suppose you observe the following situation: State of Economy…

A: Given:

Q: Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri…

A: A variance of return refers to the risk embedded in a security or an investment portfolio. Variance…

Q: What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free…

A: Beta = ( Expected retrun -risk free rate) / (market return - risk free rate )

Q: What is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and…

A: Stock valuation is a quantitative approach that an analyst or management of the company undergoes…

Q: A. Realized return B. Ex ante alpha C. Ex post alpha D. Realized beta Question 7 (MCQ) One example…

A: The question is multiple choice question. Required Choose the Correct Option.

Q: What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear…

A: Estimated rate of return is the rate of return which an investor expects to generate from the…

Q: According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0…

A: CAPM is useful model to calculate theoretically/ expected rate of return It considers risk free rate…

Q: Consider the following information (Assume that Security M and Security N are in the same financial…

A: Systematic risk is also known as non-diversifiable risk, and it exist for entire market. It arises…

Q: Supposing the return from an investment has the following probability distribution Return…

A: Expected return: The entire amount of money an investor anticipates making or losing on a specific…

Q: What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0,…

A: The security market line represents the capital asset pricing model (CAPM) on the graph. The…

Q: Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally…

A: a) The maximization problem for investor A with CARA preferences can be written as: Maximize U =…

Q: In the equation for expected return from the CAPM, the only input specific to the firm in question…

A: Capital asset pricing model refers to the method used for the computation of the expected return to…

Q: The security market line has a slope equal to the a) Risk-free rate b) Market risk premium c)…

A: Security market line is the line shown on a graph that represents the relationship between the…

Q: Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60…

A: As per CAPM,Required return = Rf+[β∗MRP]Where Rf = risk free rateβ = BetaMRP = Market risk…

Q: Which one of the following is the slope of the security market line? Market risk premium Risk-free…

A: The concept in question revolves around the Security Market Line (SML),a graphical representation…

Q: What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d)

A: Portfolio beta is a measure of an investment portfolio's overall volatility or systematic risk…

Q: Given the following probability distributions, what are the expected returns for the Market and for…

A: We will calculate probability weighted return for both the returns i.e. market return and security J…

Q: We believe that the single factor model can predict any individual asset’s realized rate of return…

A: Here, A B β 1.2 0.8 E(r) 0.1 0.08

Q: Consider the following information (Assume that Security M and Security N are in the same financial…

A: Total risk is the combination of systematic risk and unsystematic risk. Systematic risk is that part…

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

Consider the following hypothetical firms with their respective beta ABC- 1 MNO- 0 QRS- 1.2 XYZ- 0.85 i. Which firm has the highest risk? ii. Which firm is risk free? iii. Which firm’s returns will be equal to the market returns?

Expert Solution

This question has been solved!

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

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

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 the following information (Assume that Security M and Security N are in the same financial market): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security should have higher expected return? Group of answer choices Security M Security N Equal
Consider the following information (Assume that Security M and Security N are in the same financial market and the market is efficient): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security has more systematic risk? Group of answer choices Security M Security N Equal
Consider the following information (Assume that Security M and Security N are in the same financial market): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security has more total risk? Group of answer choices Security M Security N Equal
In the equation for expected return from the CAPM, the only input specific to the firm in question is...O. the risk-free rate.O. the market risk premium.O. beta.O. all of the above.
What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, what type of return should it realize compared to the market portfolio?
You observe the following: ABC Inc. has 1.8 Beta and .2 Expected return XYZ Inc has 1.6 Beta and .19 Expected return What would the risk free rate be if ABC and XYZ, were priced correctly?
Suppose you have the follow information about Intrinsic Co. and the market. What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d) 1.26 Intrinsic Co. Returns 15.4% 17.9% 21.5% Market Returns 9.1% 10.8% 13.5%
Suppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.
Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
Which of the following statements about the Security Market Line are correct? I. The intercept point is the market rate of return. II. The slope of the line is beta. III. An investor should accept any return located above the SML line. IV. A beta of 0.0 indicates the risk-free rate of return
Expected return