QUESTION THREE Investors and the Investment Process 1. Assume that you expect the economy's rate of inflation to be 3 percent, giving an RFR of 6 percent and a market return (RM) of 12 percent. a. Draw the SML under these assumptions. Page 3 of 3 (5 Marks) b. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent. What effect would this have on the RFR and the RM? Draw another SML on the graph from Parta. (5 Marks) c. Draw an SML on the same graph to reflect an RFR of 9 percent and an RM of 17 percent. How does this SML differ from that derived in Part b? Explain what has transpired. (5 Marks) 2. Calculate the expected (required) return for each of the following stocks when the risk-free rate is 0.08 and you expect the market return to be 0.14. Stock Beta A 1.72 B 1.14 с 0.76 D 0.44 E 0.03 F -0.79
QUESTION THREE Investors and the Investment Process 1. Assume that you expect the economy's rate of inflation to be 3 percent, giving an RFR of 6 percent and a market return (RM) of 12 percent. a. Draw the SML under these assumptions. Page 3 of 3 (5 Marks) b. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent. What effect would this have on the RFR and the RM? Draw another SML on the graph from Parta. (5 Marks) c. Draw an SML on the same graph to reflect an RFR of 9 percent and an RM of 17 percent. How does this SML differ from that derived in Part b? Explain what has transpired. (5 Marks) 2. Calculate the expected (required) return for each of the following stocks when the risk-free rate is 0.08 and you expect the market return to be 0.14. Stock Beta A 1.72 B 1.14 с 0.76 D 0.44 E 0.03 F -0.79
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 38QA
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Transcribed Image Text:QUESTION THREE
Investors and the Investment Process
1. Assume that you expect the economy's rate of inflation to be 3 percent, giving an
RFR of 6 percent and a market return (RM) of 12 percent.
a. Draw the SML under these assumptions.
Page 3 of 3
(5 Marks)
b. Subsequently, you expect the rate of inflation to increase from 3 percent to 6
percent. What effect would this have on the RFR and the RM? Draw another SML
on the graph from Parta.
(5 Marks)
c. Draw an SML on the same graph to reflect an RFR of 9 percent and an RM of
17 percent. How does this SML differ from that derived in Part b? Explain what
has transpired.
(5 Marks)
2. Calculate the expected (required) return for each of the following stocks when
the risk-free rate is 0.08 and you expect the market return to be 0.14.
Stock
Beta
A
1.72
B
1.14
с
0.76
D
0.44
E
0.03
F
-0.79
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