If the expected rates of return on Portfolio A and B are 11% and 14% respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is at 6%, while the expected return of the S&P500 index is 12%. The standard deviation of Portfolio A is 10% annually while that of B is 3196 and that of the Index is 20%. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your holdings? Explain. Suppose shareholder equity invested in a utility is USs10omillion and the equity beta is o.6. if the treasury bill rate is 6% and the market risk premium is 8%, what would be the expected annual profit by the Utility is the Utility. (note: Regulators allow utility firms to set prices at a level expected to generate profits using the CAPM)
If the expected rates of return on Portfolio A and B are 11% and 14% respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is at 6%, while the expected return of the S&P500 index is 12%. The standard deviation of Portfolio A is 10% annually while that of B is 3196 and that of the Index is 20%. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your holdings? Explain. Suppose shareholder equity invested in a utility is USs10omillion and the equity beta is o.6. if the treasury bill rate is 6% and the market risk premium is 8%, what would be the expected annual profit by the Utility is the Utility. (note: Regulators allow utility firms to set prices at a level expected to generate profits using the CAPM)
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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Help with sub question d and e
Transcribed Image Text:Question 2
Suppose the yield on short -term government securities (perceived to be risk-free) is about
4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the
CAPM
a. What is the expected return on the market portfolio
b. What would be the expected return on a zero-beta stock?
c. Suppose you consider buying a share of stock at K40. The stock is expected
to pay a dividend of K3 next year and to sell then for K41. The stock risk has
been evaluated at Beta - -0.5. Is the stock overpriced or Under-priced?
(show your workings)
d. If the expected rates of return on Portfolio A and B are 11% and 14%
respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is
at 6%, while the expected return of the S&P500 index is 12%. The standard
deviation of Portfolio A is 10% annually while that of B is 3196 and that of the
Index is 20%. If you currently hold a market index portfolio, would you
choose to add either of these portfolios to your holdings? Explain.
e. Suppose shareholder equity invested in a utility is USs10omillion and the
equity beta is o.6. if the treasury bill rate is 6% and the market risk premium
is 8%, what would be the expected annual profit by the Utility is the Utility.
(note: Regulators allow utility firms to set prices at a level expected to
generate profits using the CAPM)
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