REQUIRED RATE OF RETURN (Percent)201612coO0.40.81.2RISK (Beta)The risk-free rate will remain constant.1.6The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, theThe risk-free rate will increase.2.0Which of the following statements best describes a shift in the SML caused by increased risk aversion?The risk-free rate will decrease.New SMLthe slope of the SML.

The tendency of investors to avoid the incurrence of loss is known as risk aversion. Risk takers…

REQUIRED RATE OF RETURN (Percent) 20 16 N 0 0 0.4 0.8 1.2 RISK (Beta) O The risk-free rate will remain constant. 1.6 The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the O The risk-free rate will increase. 2.0 Which of the following statements best describes a shift in the SML caused by increased risk aversion? O The risk-free rate will decrease. New SML the slope of the SML.

REQUIRED RATE OF RETURN (Percent) 20 16 N 0 0 0.4 0.8 1.2 RISK (Beta) O The risk-free rate will remain constant. 1.6 The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the O The risk-free rate will increase. 2.0 Which of the following statements best describes a shift in the SML caused by increased risk aversion? O The risk-free rate will decrease. New SML the slope of the SML.

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 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

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“In investing, risk and return are highly correlated. Increased potential returnson investment usually go hand-in-hand with increased risk”. Critically evaluatethe above statement.ii A Financial Analyst is analyzing two investment alternatives Y and Z. Theirrates of returns under different probabilities are as follows.Probability Rate of ReturnY Z0.2 22% 5%0.6 14% 15%0.2 -4% 25%a. For Y and Z, calculate expected return, variance and standard deviation.b. Calculate the coefficient of variation for both stocks.c. If you are an investor, which company you would select for theinvestment.
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REQUIRED RATE OF RETURN (Percent) Tool tip: Mouse over the points on the graph to see their coordinates. 16 20 12 Slope: 6 Y-Intercept: 2 0.4 0.8 1.2 1.6 2.0 RISK (Beta) New SML (?) The SML helps determine the level of risk aversion among Investors. The higher the level of risk aversion, the the slope of the SML. Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required returns?) Medium-beta stocks High-beta stocks Low-beta stocks All stocks affected the same, regardless of beta
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 should have higher expected return? Group of answer choices Security M Security N Equal
APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Step 1 Security market line (SML) is a graphical representation of how the approach of the capital asset pricing model (CAPM) operates. SML represents the combination of risk-free return, market return, and beta to depict the expected return of the security. CAPM is a financial approach that helps to determine the expected return of security by creating a relationship between the systematic risk associated with the security and returns of assets. Expected return on a stock is the…
Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. 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. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
Hi please solve this both parts
3 9. The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020, Use the data to answer the questions that follow. a. On the basis of a review of the return data, which investment appears to be more risky? Why? b. Calculate the standard deviation for each investment's returns. c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation in part a. Review Only Click the icon to see the Worked Solution. a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answer below.) O A. The riskier investment appears to be investment B, with returns that vary widely from the average relative to investment A, whose returns show less deviation from the average. O B. Investment A and investment B have equal risk because the average returns are the same. O C. The riskier investment appears to be investment A, with returns…
Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%
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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