Suppose Woolworths has a beta of 0.51 and Qantas has a beta of 1.78. The risk- free interest rate is 2.20% and the market risk premium is 5.20%. According to the CAPM, what is the expected return on a portfolio that borrowed 38% of its value at the risk free rate and invested 33% in Woolworths, 39% in Qantas, and the remainder in a market security (a diversified portfolio with systematic risk equivalent to the market)? Report your answer as a decimal to four decimal places.

Suppose Woolworths has a beta of 0.51 and Qantas has a beta of 1.78. The risk- free interest rate is 2.20% and the market risk premium is 5.20%. According to the CAPM, what is the expected return on a portfolio that borrowed 38% of its value at the risk free rate and invested 33% in Woolworths, 39% in Qantas, and the remainder in a market security (a diversified portfolio with systematic risk equivalent to the market)? Report your answer as a decimal to four decimal places.

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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Using the CAPM theory, if the Volatility of a stock is twice as great as the market, the market return on stocks in general (using the S&P 500 as a proxy) is 12 %, and treasury bills are yielding 2%, what is the return that investors in that security can expect? C r = Rf + beta x (Km - Rf) where r is the expected (required) return rate on a security (based on how risky it is); Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class (Market Return) Beta measures the volatility of the security, relative to the asset class. 12% 16% 22% Capital Assets Pricing Model 20%
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.25 and an expected return of 15%. The other stock has an expected return of 21%. The total portfolio is equally as risky as the market (i.e.Bp=1). What is the beta for the other stock in your portfolio? What is the expected return of the risk-free asset? What is the expected return of the market? What is the expected return of your portfolio?
Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a volatility of 16%. 3M stock has a 22% volatility and a correlation with the market of 0.50. Required 1.what is 3M's beta with the market? 2. What capital market line portfolio has equivalent market risk 3. what is the expected return?
Consider a firm with a beta of 1.57. If the market return is 6.73% and the risk-free rate is 0.90%, what is the firm's expected return according to the capital asset pricing model? Round your answer to four decimal places, e.g., enter 12.34 for 12.34%.
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A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -
If the risk free rate is 4.4%, the expected return on the market portfolio (i.e., Rm)( is 11.6%, and the beta of Stock B is 0.9 , what is the required rate of return for Stock B according to the Capital Asset Pricing Model (CAPM)? (Round your answer rounded to one decimal place and record without a percent sign). Your Answer: If the risk free rate is 1.2%, the market risk premium (i.e., Rm - Rf) is 13.5%, and the beta of Stock B is 1.9 , what is the required rate of return for Stock B according to the Capital Asset Pricing Model (CAPM)? (Round your answer rounded to one decimal place and record without a percent sign). Your Answer:
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?
1. Suppose you have n risky assets you can combine in a portfolio. Each risky asset has an expected return of 8% and a standard deviation of 30%. The risky assets are uncorrelated with each other. (a) Consider an equally weighted portfolio of 2 of these securities. What is its expected return? What will its standard deviation be? (b) Consider an equally weighted portfolio of 30 of these securities. What is its expected return? What will its standard deviation be? (c) Suppose we let the number of these securities increase without bound. That is, n→ ∞o. What happens to the standard deviation of an equally weighted portfolio of these securities as the number of assets in the portfolio becomes extremely large? What will the riskless rate be in this case, and why? -int IDE
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)?
Assume you wish to hold a portfolio consisting of Loblaw stock and a riskless asset. Given the following information, calculate portfolio expected returns and portfolio betas, letting the proportion of funds invested in Loblaw range from 0 to 125% Loblaw has a beta (\ beta) of 1.2 and an expected return of 18% Risk-free rate is 7%. Loblaw weights: 0%, 25%, 50%, 75%, 100%

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