Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.Risk PremiumFactorIndustrial production (I)Interest rates (R)Consumer confidence (C)Required:8%47The return on a particular stock is generated according to the following equation:r = 17% +0.9/+0.5R+0.70 C+ ea-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%.Note: Do not round intermediate calculations. Round your answer to 1 decimal place.a-2. Is the stock over- or underpriced?a-1. Equilibrium rate of returna-2 Is the stock over- or underpriced?%

Step 1:In the context of the given problem, the equation provided…

Answered: Suppose that the market can be…

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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d. Interpret your results in (c) above, assuming that the historical average return of 8.5% from the stock is a good benchmark. e. Critically evaluate the strengths and weaknesses of applying the implied rate of return from the RIVM as a proxy of the expected return.
How do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.
The risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is the required rate of return on the stock, E(Ri)? Use the CAPM equation.
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
2) see picture
Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.30 0.05-0.15 Normal 0.55 0.15 0.15 Boom 0.15 0.20 0.35 Calculate the expected return for the two stocks.
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Stock Expected Return Standard Deviation A 8% 55% B 4% 45% Correlation = −1 Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a “synthetic” risk-free asset?) (Round your answer to 2 decimal places.) b. Could the equilibrium rƒ be greater than rate of return?
Baghiben
The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True False
Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?
i) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
1.) Risk-free rate (rRF) _______ 2.) Market risk premium (RPM) _______ 3.) Happy Corp. stock’s beta _______ 4.) Required rate of return on Happy Corp. stock _______ 5.) Happy Corp.’s new required rate of return is _______ .

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