Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium 6% Industrial production (I) Interest rates (R) 2% Consumer confidence (C) 5% The return on a particular stock is generated according to the following equation: r=15% +1.4/+0.7R+0.90C+ e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 7%. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Equilibrium rate of return %

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium 6% Industrial production (I) Interest rates (R) 2% Consumer confidence (C) 5% The return on a particular stock is generated according to the following equation: r=15% +1.4/+0.7R+0.90C+ e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 7%. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Equilibrium rate of return %

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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Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Risk Premium Factor Industrial production (I) Interest rates (R) Consumer confidence (C) Required: 8% 4 7 The return on a particular stock is generated according to the following equation: r = 17% +0.9/+0.5R+0.70 C+ e a-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 return a-2 Is the stock over- or underpriced? %
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production (I) 8 % Interest rates (R) 4 % Consumer confidence (C) 6 % The return on a particular stock is generated according to the following equation: r = 16% + 1.6I + 0.8R + 1.30C + e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not round intermediate calculations. Round your answer to 1 decimal place.) a-2. Is the stock over- or underpriced?
Q. Market rate of return is 18%, risk-free rate of return 8% and beta is 1.2 1. Calculate the required rate of return 2. Calculate risk premium
QUESTION 1 Exhibit 5.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stock Rit Rmt ai Beta A 10.6 15 0 0.8 Z 9.8 8.0 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)? a. 4.40 b. −1.70 c. 3.40 d. −4.40 e. −1.86
Stock A B Expected Return 10% 15 Correlation-1 Standard Deviation 5% 10 Suppose that it is possible to borrow at the risk-free rate, r What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)
8. Given the following information what must be the risk-free rate of interest (assume the asset is properly priced)? The expected return of the market is 14.25%, the stock's B is.82 and the expected return of the asset is 12.89%. A.5.91% B. 6.69% C. 7.41% D. 8.93%
Question 16 a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market…
13. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) REQUIRED RATE OF RETURN (Percent) 20.0 16.0 20 12.0 16 8.0 12 4.0 0 0 CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's betal Required rate of return on Happy Corp. stock 0 Happy Corp.'s new required rate of return is F 0.6, 7.6 HC's Stock ☐ 0.5 An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. 0 1.0 RISK (Beta) Tool tip: Mouse over the…
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stock
A. Realized return B. Ex ante alpha C. Ex post alpha D. Realized beta Question 7 (MCQ) One example of a build up model is: A. A macroeconomic model B. Capital Asset Pricing Model (CAPM) C. Bond yield plus risk premium D. Fama and French model
Question 7 Consider the following Information: Portfolio ER Risk Free Market SD 6.00 13.2 A 11.2 a. Calculate the Sharpe ratios for the market portfolio and portfolio A Sharpe Ratio=(Return on portfolio-Riskfreerate)/SD Market Portfo 0.2 Portfolio A 0.21 2.1 b. If the simple CAPM is valid, is the above situation possible? 0.00 36 25 Beta Market Beta A
QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68

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