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 41%. Portfolios A and B are both well diversified. Portfolio Beta on M₁ Beta on M₂ Expected Return (%) 2.3 A B 1.8 2.2 -0.5 31 9 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 4%, and all stocks have independent firm-specific components with a standard deviation of 41%. Portfolios A and B are both well diversified. Portfolio Beta on M₁ Beta on M₂ Expected Return (%) 2.3 A B 1.8 2.2 -0.5 31 9 What is the expected return-beta relationship in this economy

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
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
2- Assume that the market has an expected return of 12% and volatility (standard deviation) of 20%. Company X has a 50% volatility (standard deviation). The correlation between the market and Company X is 90%. The risk-free rate is 3%. What would be the expected return on Company X? (Hint: You have to check my lecture note (Lecture Note #10b - Risk and Return: Capital Asset Pricing Model (CAPM)) 23% O 23,25% 23,50% 23,75% Diğer:
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
Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Stock C Boom .15 .35 .45 .27 Good .55 .16 .10 .08 Poor .25 -.01 -.06 -.04 Bust .05 -.12 -.20 -.09 a) Your portfolio is invested 40 percent each in A and C, and 20 percent in B. What is the expected return of the portfolio? b) What is the variance of this portfolio? The standard deviation? Stock C .45 .27 .10 .08 -.06 -.04 -.20 -.09
Villalpando Winery wants to raise $35 million from the sale of preferred stock. If the winery wants to sell one million shares of preferred stock, what annual dividend will it have to promise if investors demand a return of a. 12%? b. 16%? c. 9%? d. 10%? e. 6%? f. 4%?
Finance The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Arethese stocks correctly priced? Why or why not? Use E(Ri) = Rf + βi(E(RM) − Rf).
What are the risk premiums of the two factors and what is the risk-free rate?
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 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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