Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 45%. The following are well-diversified portfolios: Portfolio Beta on F1 1.5 B 2.2 E(rp) Beta on F2 2.0 -0.2 % + (Bp1 x Expected Return What is the expected return-beta relationship in this economy? (Do not round intermediate calculations.) 31% 27% %) + (Bp2 x

Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 45%. The following are well-diversified portfolios: Portfolio Beta on F1 1.5 B 2.2 E(rp) Beta on F2 2.0 -0.2 % + (Bp1 x Expected Return What is the expected return-beta relationship in this economy? (Do not round intermediate calculations.) 31% 27% %) + (Bp2 x

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 there are two independent economic factors, M₁ and M2. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 58%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 A 1.7- 2.4 2.3 -0.8 Expected Return (%) 37 10 B Required: What is the expected return-beta relationship in this economy? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Expected return-beta relationship E(rp) = % + BP1+ BP2
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.) a. The effect of a change in the market risk premium depends on the slope of the yield curve. b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the level of the risk-free rate. e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
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?
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?
Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 46%. Portfolios A and B are both well diversified. Portfolio A Beta on M₁ 1.5 2.0 Beta on My 2.1 -0.6 Required: What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(rp) = Expected Return (%) 36 14 45 60 Answer is not complete. Bp1 Bp2
Assume that both portfolios A and B are well diversified, that E(rA) = 20% and E(rB) = 15%. If the economy has only one factor, and BetaA = 1.3, whereas BetaB = 0.8, what must be the risk-free rate (write as percentage, rounded to two decimal places)?
The risky portfolio expected return and standard deviation is 14% and 20%, respectively. The risk free rate is 5%. The risk aversion coefficient A is 2.5 and 4 for Mary and Kim, respectively. Answer the following questions: A. Who is more risk averse? B. What is the capital allocation y to the risky portfolio for each investor? C. Suppose investors have the following utility function: U = E(R) - ¹2 Ao² Calculate the Utility level for each investor's optimal complete portfolio.
Suppose that there are two independent economic factors, F1 and F2, the risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 30%. The following are well-diversified portfolios: Portfolio Beta on F1 Beta on F2 Expected Return A 1.1 1.5 15% B 0.9 0.5 13% What is the expected return-beta relationship in this economy?
Suppose we have the following information: Securit Amount Invested Expected Return Beta Stock A RM1 ,OOO 8% 0.80 Stock B RM2,OOO 12% 0.95 Stock C RM3,OOO 15% 1.10 Stock D RM4,OOO 18% a) Compute the expected return on this portfolio. b) Calculate the beta of the portfolio. c) Does this portfolio have more or less systematic risk than an average asset? Explain.

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