Answered: The risk-free rate is currently 3.3%,…

The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

100%

The risk-free rate is currently

3.3%,

and the market return is

14.8%.

Assume you are considering the following investments:

Investment Beta

A 1.54

B 1.16

C 0.51

D 0.11

E 2.14

a. Which investment is most risky? Least risky?

b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments.

c. Find the security market line (SML), using your findings in part

d. On the basis of your findings in part

what relationship exists between risk and return? Explain.

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

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