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 53%. Portfolios A and B are both well-diversified with the following properties:PortfolioABBeta on F11.52.5Beta on F2 Expected Return1.9-0.1931%28%Required:What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2to complete the equation below.Note: Do not round intermediate calculations. Round your answers to 2 decimal places.E(rp) rf+(BP1 x RP1) + (BP2 x RP2)"%RP%RP2%

Beta on F1 in A = 1.5Beta on F2 in A = 1.9Expected return of A = 31%Beta on F1 in B = 2,5Beta on F2…

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 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 1.9 Expected Return 31% -0.19 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp) rf+(PP1 x RP1) + (BP2 x RP2) " % RP % RP2 %

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 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 1.9 Expected Return 31% -0.19 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp) rf+(PP1 x RP1) + (BP2 x RP2) " % RP % RP2 %

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 5%, and all stocks have independent firm- specific components with a standard deviation of 48%. Portfolios A and B are both well diversified. Portfolio A B Beta on M₁ 1.6 2.2 Beta on M₂ 2.3 -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 (%) 38 8 Answer is complete but not entirely correct. Bp1 + 5.00 % 4.43 11.26 Bp2
Consider the following portfolio choice problem. The investor has initial wealth w andutility u(x) = (x^n) /n. There is a safe asset (such as a US government bond) that has netreal return of zero. There is also a risky asset with a random net return that has onlytwo possible returns, R1 with probability 1 − q and R0 with probability q. We assumeR1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A isinvested in the safe asset.i) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?ii) Find A as a function of w.
see attached image.
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%.
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 40%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.8 2.2 30 B 2.1 -0.5 8 Required: What is the expected return–beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate and explain the result of the CAPM based on the following data. a. Expected Return: 8% b. Risk-free rate: 4% c. Beta of the investment: 1.2 ER=Rf+B(ERm - Rf) where: ER = expected return of investment Rf risk-free rate B;= beta of the investment - (ERm - Rf) = market risk premium
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 50%. Portfolios A and B are both well diversified. Portfolio A B Beta on M₁ 1.6 2.4 Beta on M2 2.5 -0.7 Expected Return (%) 40 10 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) = 6.00 % + Bp1 + PP2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Investment Beta Analyst's Estimated Return Stock X 2.3 15.5% Stock Y 1.2 13.6% Market Portfolio 1.0 11.5% Risk-free rate 4.0% What is the required rate of return for Stock X based on the capital asset pricing model (CAPM)?
Consider two well-diversified portfolios: Portfolio 1 has an expected return of 8% and a beta of 0.80 while Portfolio 2 has an expected return of 13% and a beta of 1.50. If the risk-free rate is 1.5%, which portfolio would a rational risk-averse investor prefer and why? O A. Portfolio 2 because it has the higher reward to risk ratio. O B. Portfolio 1 because it has the higher reward to risk ratio. OC. Portfolio 2 because it has the higher reward. O D. Portfolio 1 because it has the lower risk.
What are the risk premiums of the two factors and what is the risk-free rate?
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 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 Expected Return 1.9 -0.19 31% 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. = E(rp) rf+(PP1 x RP1) + (BP2 x RP2) % RP1 % RP2 %

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