Suppose that expectations about the S&P 500 index and the T-bill rate are the same as they were in 2009, but you find that a greater proportion s invested in T-bills today than in 2009. What can you conclude about the change in risk tolerance over the years since 20097
Q: You hear on the news that the S&P 500 was down 2.1% today relative to the risk-free rate (the…
A: Excess return to Zynga=Zynga Beta*Market excess return.=1.3*(−2.1%)=−2.7%
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Q: You hear on the news that the S&P 500 was down 2.1% today relative to the risk-free rate (the…
A: Market risk premium: -2.1%Beta od Hewlett: 1.1Beta of Proctor and Gamble: 0.4
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Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…
A: SML means security market line. CAPM means capital asset pricing model.
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Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…
A: we will only answer the first three subparts. For the remaining subparts kindly resubmit the…
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- 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%During the coming year, the market risk premium (rm− rf), is expected to remain the same, while the risk-free rate, rf, is expected to fall. Given this forecast, which of the following statements is CORRECT? Group of answer choices The required return will fall for all stocks, but it will fall less for stocks with higher betas. The required return will fall for all stocks, but it will fall more for stocks with higher betas. The required return on all stocks will remain unchanged. The required return for all stocks will fall by the same amount. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.You are analyzing a Time Series of historic market information and found the following information for a particular investment security: the Rate of Return in 2012 was -6.72%; was 18.22% in 2013; was 7.75% in 2014; was 11.45% in 2015; was 4.94% in 2016; and was 18.11% in 2017. What is the arithmetic average rate of return? Show your answer as a percentage rounded to two places (12.34% for example). Group of answer choices 7.64% 8.96% 8.14% 7.24% None of the above
- Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall. Given this forecast, which of the following statements is CORRECT? a. The required return on all stocks will remain unchanged. b. The required return will fall for all stocks, but it will fall more for stocks with higher betas. c. The required return for all stocks will fall by the same amount. d. The required return will fall for all stocks, but it will fall less for stocks with higher betas. e. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Period 1927-2021 1927-1950 1951-1974 1975-1998 1999-2021 Average Annual Returns U.S. equity 12.17 10.26 10.21 17.97 10.16 1-Month T-Bills 3.30 0.93 3.59 6.98 1.66 U.S. Excess return 8.87 9.33 6.62 10.99 8.50 Equity Market Standard Deviation 20.25 26.57 20.32 14.40 18.85 Sharpe Ratio 0.44 0.35 0.33 0.76 0.45 Required: a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is u = E(r) 0.5 × Ao². b. What if you believe that the 1975-1998 period is representative?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?Suppose the SML has a risk-free rate of 5% and an expected market return of 15%. Now suppose that the SML shifts, changing slope, so that kRF is still 5% but kM is now 16%. What does this shift suggest about investors’ risk aversion? If the slope were to change downward, what would that suggest?Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) +6.9 Change in energy prices 0.4 Change in long-term interest rates +2.6 Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.8%. A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.) A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.) A pure-play energy stock with high exposure to the energy factor (b = 1.9) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.) An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.9 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices…
- In the CAPM, the market risk premium can be estimated by several methods. Based on long-term historical data, it is about 5%, more or less. Based on implied premium method, it changes over time. When did the implied premium rise to a very high level, 1999 or 2009? EXPLAIN PLEASEUsing the data generated in the attached picture: Plot the Security Market Line (SML) Superimpose the CAPM’s required return on the SML Indicate which investments will plot on, above and below the SML? If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) + 6.5 Change in energy prices 0.5 Change in long-term interest rates +2.9 Calculate expected rates of return on the following stocks. The risk - free interest rate is 6.8%. A stock whose return is uncorrelated with all three factors