Am. 135. Consider the following scenario analysis:Rate of ReturnScenarioRecessionNormal economyBoomProbabilityStocks0.20-5%Bonds17%0.5020%1 9%0.3029%7%a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?b. Calculate the expected rate of return and standard deviation for each investment.c. Which investment would you prefer?Complete this question by entering your answers in the tabs below.Required A Required BRequired CIs it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?< Required ARequired B >

σ bonds= (0.20×(17%−10%) 2)+(0.50×(9%−10%) 2)+(0.30×(7%−10%) 2)�bonds=(0.20×49)+(0.50×1)+(0.30×9)σ…

Answered: Consider the following scenario…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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9. This problem will give you some practice calculating measures of prospective portfolio performance. There are two assets and three states of the economy: Rate of return if state occurs Probability of state of economy State of economy Equity A -0.15 Equity B Recession 0.20 0.20 Normal 0.50 0.20 0.30 Вoom 0.30 0.60 0.40 What are the expected returns and standard deviations for these two equities?
QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…
4. Given a real rate of interest of 3.2%, an expected inflation premium of 5.1%, and risk premiums for investments A and B of 7.4% and 8.9% respectively, find the following: a. The risk-free rate of return, r; b. The required returns for investments A and B Review Only Click the icon to see the Worked Solution. a. The risk-free rate of return is %. (Round to one decimal place.) b. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.)
Please do a and b separate (Question 2) a) Plot the Security Market Line (SML)b) Superimpose the CAPM’s required return on the SMLc) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph.
Please could part iii) be answered
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investments b1 b2 X 1.75 0.25 Y 1.00 2.00 Z 2.00 1.00 Assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills offer zero risk premium. a. According to the APT, what is the risk premium on each of the three stocks? b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? c. Suppose you buy $80 of X and $60 of Y and sell $40 of Z. What is the sensitivity of your portfolio to…
Based on the information in the yellow shaded areas: a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?
Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.
What is the appropriate required return of CSB on this financial accounting question?
solve this practice problem
Which of the following best explains an upward sloping Treasury yield curve? A. Maturity risk is expected to decline in the future B. Long-term interest rates are more volatile than short-term rates C. Inflation risk premiums are higher for longer terms to maturity D. Default risk is higher for longer terms to maturity

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