ecurity A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.) b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6%, what is the value of r

ecurity A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.) b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6%, what is the value of r

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2Q: Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a...

See similar textbooks

Related questions

Q: s NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to…

Q: Consider a world with only two risky assets, A and B, and a risk-free asset. The two risky assets…

A: The capital Asset Pricing Model(CAPM) is the model that shows the relationship between the…

Q: Part 1 (Excel): Assume you want to invest in a market with two risky assets and the risk-free rate.…

A: Best Risky Portfolio is the one which provide highest return against the risk which can be…

Q: When working with the CAPM, which of the following factors can be determined with the most…

A: Capital Asset Pricing Model (CAPM) is a theoretical framework used in finance to determine the…

Q: Two assets have the following expected returns and standard deviations when the risk-free rate is…

A: Given, Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% A =3

Q: Would this asset be considered more or less risky than the market? The asset is a. Equally as…

A: An assets risk is represented by stock Beta which indicates that how much movement of stock with…

Q: Which of the following is NOT one of the 3 parameters of the Security Market Line (SML)? Group of…

A: SML is the security market line. SML is used to calculate the expected return from the investment in…

Q: please give me answer in relatable

A: For the purpose of calculating the anticipated return on the portfolio, we make use of the Capital…

Q: d) The return on the risk-free asset is 5%. You are given the following information: Security Firm A…

A: Risk free rate (Rf) = 0.05Market return (Rm) = 0.12Market standard deviation (Sm) = 0.20

Q: Assume a security follows a geometric Brownian motion with volatility parameter sigma=0.2. Assume…

A: You have stated that "I got an answer of $3.00 for the cost of the call option" and then you have…

Q: Assume an investor with the coefficient of risk aversion A=5.5. To maximize her expected utility,…

A: Utility functions are used to measure the risk-reward tradeoff as the maximum return that a person…

Q: You are reviewing two investment opportunities: the shares of company A and company B. Company A has…

A: Risk refers to variability of return and is measured by the standard deviation. The total risk of a…

Q: 8. In a single-factor market, the SML relationship of both the CAPM and the APT states that the risk…

A: The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are two financial…

Q: In the context of the Pastor-Stambaugh multifactor model (PSM), the relevant risk factors are the…

A: Risk factors in both the Pastor-Stambaugh and Fama-French models include: Market Risk (MKT): This…

Q: Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The…

A: Given, CSCO Expected rate of return = 0.1375 Beta = 1.3 Risk Free Rate = 0.04 Market expected…

Q: A security has a beta of 1.20. Is this security more or less risky than the market? Explain. Assess…

A: The beta of a stock is the degree of responsiveness to movements in price with changes in the stock…

Q: Consider a one-period model with = {1,2,3} and two risky assets S₁, S2 whose with current prices are…

A: In a one-period model, the risk-neutral probability measure Q is determined by the no-arbitrage…

Q: Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9…

A: Capital asset pricing model is the most efficient model to calculate the expected rate of return of…

Question

100%

Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of r_M is 12%.

a.	To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
b.	What are the beta coefficients of A and B? Calculations are necessary.
c.	If the risk-free rate is 6%, what is the value of r_M?

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

Expert Solution

This question has been solved!

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

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

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

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
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
Security A offers an expected rate of return of 12% with a standard deviation of 18%, and security B offers an expected return of 6% with a standard deviation of 25%. Obviously, security B is inferior to security A with respect to both mean return and standard deviation. Assume investors are risk-averse, why would anyone hold security B?
Security A has an expected rate of return of 6%, a standard deviation ofreturns of 30%, a correlation coefficient with the market of 20.25, and abeta coefficient of 20.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, anda beta coefficient of 0.5. Which security is more risky? Why?
The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?
Which of the two securities are the best? By using probability estimates, below is the computation of ff. statistics: Statistic Security A Security B Expected return Standard deviation 12% 20% 8% 10% Requirement Calculate the coefficient of variation for each security Explain why the standard deviation and coefficient of variation give different ranking of risk. Which method is superior and why?
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
Shifts in the security market line Assume that the risk-free rate, RF, is currently 8%; the market return, rm, is 12%; and asset A has a beta, bA, of 1.10. a. Draw the security market line (SML) on a set of “nondiversifiable risk (x-axis)–required return (y-axis)” axes.b. Use the CAPM to calculate the required return, rA, on asset A, and depict asset A’s beta and required return on the SML drawn in part a.c. Assume that as a result of recent economic events, inflationary expectations have declined by 2%, lowering RF and rm to 6% and 10%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A.d. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 1%, to 13%. Ignoring the shift in part c,draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A.e. From the previous changes, what conclusions can be…
A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous location
The risk-free rate and the expected market rate of return are 0.06 and 0.12 respectively. Using the CAPM model the expected rate of return of a security with a beta of 1.2 would be
The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model, the expected rate of return of a security, that you are interested in, has a beta of 1.25 would be equal to Calculate the expected rate of return
Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is A. 1.7. B. 0.95. C. 1. D. 1.25.