The market excess return is 12% and the risk-free rate is 3%. Assume CAPM is a good description of stock price returns. New information has led to the expected returns shown in the table, which stocks present an opportunity for Mary to buy and which should she choose to sell? Required Return Expected Return 25% 19% Beta 1.666 Stock A Stock B Stock C Stock D Stock E 20% 16% 1.083 14% 13% 16% 1.166 OSell Stocks B and E, Buy Stocks A and D Sell Stocks B and E, Buy Stocks A, C and D Sell Stocks A and D, Buy Stocks B and E OSell Stocks A and D, Buy Stocks B, C and E
The market excess return is 12% and the risk-free rate is 3%. Assume CAPM is a good description of stock price returns. New information has led to the expected returns shown in the table, which stocks present an opportunity for Mary to buy and which should she choose to sell? Required Return Expected Return 25% 19% Beta 1.666 Stock A Stock B Stock C Stock D Stock E 20% 16% 1.083 14% 13% 16% 1.166 OSell Stocks B and E, Buy Stocks A and D Sell Stocks B and E, Buy Stocks A, C and D Sell Stocks A and D, Buy Stocks B and E OSell Stocks A and D, Buy Stocks B, C and E
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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:The market excess return is 12% and the risk-free rate is 3%. Assume CAPM is a good description
of stock price returns. New information has led to the expected returns shown in the table, which
stocks present an opportunity for Mary to buy and which should she choose to sell?
Expected Return
Beta
1.666
Required Return
Stock A
25%
Stock B
19%
20%
Stock C
16%
1.083
Stock D
14%
13%
Stock E
16%
1.166
Sell Stocks B and E, Buy Stocks A and D
Sell Stocks B and E, Buy Stocks A, C and D
OSell Stocks A and D, Buy Stocks B and E
OSell Stocks A and D, Buy Stocks B, C and E
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