for next The risk-free rate, re is 9%. Your probability distribution for rM year is as follows: Probability 0.1 (14%) 0.2 0.4 15 0.2 25 0.1 44 Determine graphically the beta coefficients for Stocks A and B. b. Graph the Security Market Line, and give its equation. Calculate the required rates of return on Stocks A and B. d. Suppose a new stock, C, with f- able. Is this stock in equilibrium; that is, does the required rate of return on Stock C equal its expected return? Explain. If the stock is not in equilibrium, explain how equilibrium will be restored. a. C. 18% and b̟ = 2.0, becomes avail- %3D
for next The risk-free rate, re is 9%. Your probability distribution for rM year is as follows: Probability 0.1 (14%) 0.2 0.4 15 0.2 25 0.1 44 Determine graphically the beta coefficients for Stocks A and B. b. Graph the Security Market Line, and give its equation. Calculate the required rates of return on Stocks A and B. d. Suppose a new stock, C, with f- able. Is this stock in equilibrium; that is, does the required rate of return on Stock C equal its expected return? Explain. If the stock is not in equilibrium, explain how equilibrium will be restored. a. C. 18% and b̟ = 2.0, becomes avail- %3D
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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Transcribed Image Text:The risk-free rate, r is 9%. Your probability distribution for r, for next
year is as follows:
Probability
0.1
(14%)
0.2
0.4
15
0.2
25
0.1
44
Determine graphically the beta coefficients for Stocks A and B.
b. Graph the Security Market Line, and give its equation.
Calculate the required rates of return on Stocks A and B.
d. Suppose a new stock, C, with f̟ = 18% and b̟ = 2.0, becomes avail-
able. Is this stock in equilibrium; that is, does the required rate of
return on Stock C equal its expected return? Explain. If the stock is
not in equilibrium, explain how equilibrium will be restored.
a.
C.
Transcribed Image Text:SECURITY MARKET LINE You are given the following historical data on
market returns, r
8A-2
and the returns on Stocks A and B, r, and rp:
M
A
Year
M
1
29.00%
29.00%
20.00%
15.20
15.20
13.10
(10.00)
(10.00)
0.50
4
3.30
3.30
7.15
23.00
23.00
17.00
6.
31.70
31.70
21.35
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