Answered: You observe the E[IBM] = 8%, E[AAPL] =…

You observe the E[IBM] = 8%, E[AAPL] = 12%, B(AAPL)=B(IBM)+2/3, Risk-free rate is 4%. What is the expected return on the market portfolio assuming the CAPM is true.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: Under what conditions might a manager interested in the maximization of shareholders’ wealth…

A: Meaning of NPV: The term net present value measures the growth level for companies i.e. the…

Q: 4. Assume that a risk-free money market account is added to the market described in Q2. The…

A: A risk-free money market refers to a financial market where short-term borrowing and lending occur…

Q: If a trader sells an option at an implied volatility of 10%, and plans to delta hedge it, over the…

A: Delta's hedging options trading strategy restricts or mitigates the directional risk of underlying…

Q: Diana usually uses a three-year payback period to determine if a project is acceptable. A recent…

A: Diana was utilizing interior pace of return as a loan cost that is making the present worth to be…

Q: Which combination maximises excess portfolio expected return per unit of risk? What is the economic…

A: A portfolio of investments refers to a collection or combination of various financial assets, such…

Q: The Cullumber Shoe Company manufactures a qumber of different styles of athletic shoes. Its biggest…

A: The Quality Performance Rate (QPR) is a metric used to measure the share of merchandise or offerings…

Q: 4. Assume that a risk-free money market account is added to the market described in Q2. The…

A: As requested below is the solution for question 4Requirement (i)Let x1 =The proportion of wealth…

Q: None

A: To determine which asset has the least total risk, we need to consider both systematic risk…

Q: The expected return on Stock X is 9.5%, the standard deviation of expected returns is 30%, and the…

A: There are two sorts of stocks: ordinary and preferred. The distinction is that whereas the owner of…

Q: A local builder offers to place with you insurance on every house he/she builds while is under…

A: DISCLAIMER “Since you have asked multiple questions, we will solve the first question for you. If…

Q: Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also,…

A: Given, The cost of purchasing the machine : $80,000 Increase in revenue due to the machine :…

Q: All else being equal, the expected cash flows of companies are considered less valuable when yields…

A: When interest rates are higher, bond investors are owed larger interest payments.

Q: Data point X value is 110 and has an assigned weight of 3 Data point Y value is 290 and has an…

A: percentage weight of the total for data point Y = (weight assigned to Y/ total weights)*100

Q: Consider two European call options on the same stock with thesame strike price of $40. One option…

A: The provided question has been answered from the theories of 'Financial Economics'.A branch of…

Q: company is considering manufacturing 2 mutually exclusive products A and B. Product A is a watch…

A: Net present value (NPV) is the difference between the present worth of cash inflows and the present…

Q: Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x)…

A: Risk aversion is a term used to describe an individual's preference for avoiding risk or uncertainty…

Q: You have just won the lottery. The state offers you an amortized payout of $200,000 at the end of…

A: A lump sum is defined as a single large sum of money. In contrast to a series of payments made over…

Q: Given the attached information: Estimate the betas for Blandy and Gourmange companies? If you…

A: Data market(percentage) Blandy(%) Gourmange(%) 30 26 47 7 15 -54 18 -14 15 -22 -15 7…

Q: The target investors of the new issuance of the 800,000 P1,000-par value shares expect a return of…

A: Return rate = 14% Par value = 1000p Return per share = 160

Q: Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x)…

A: Utility function, u(x) = x^n/n Initial wealth = w There is a safe asset (such as a US government…

Q: Let us assume that you have two possible mutually exclusive projects available and you need to…

A: We have been given two projects with the following possible pr Project A Ri pi 50 0.4 20 0.5…

Q: Dayton Electronics demands a part at a daily rate of 72 units. The lead time for replenishment is 5…

A: Given:Daily demand = 72 unitsLead time = 5 daysSD of demand during lead time = 9Item cost =…

Question

You observe the E[IBM] = 8%, E[AAPL] = 12%, B(AAPL)=B(IBM)+2/3, Risk-free rate is 4%. What is the expected return on the market portfolio assuming the CAPM is true.

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.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define expected return

VIEW

Step 2: Calculate the expected rate of return

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

What would the correct risk premium on 10-year municipal bond with yield of 2.5%, given that 10-year Treasuries pay 3.0% and the investor is in 30% income tax bracket?
What is the current price of Tummy Ache stock if it is expected to pay a dividend of $1.26 every quarter forever, the stock's expected return is 11.63% per year, and the next dividend is expected in 3 months? $43.34 (plus or minus 10 cents) $130.01 (plus or minus 10 cents) $10.83 (plus or minus 10 cents) $38.82 (plus or minus 10 cents) the answer cannot be obtained based on the given information
please answer part c and d. Please make sure your answer is correct.
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.a) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?b) Find A as a function of w.
You are going to earn ωt = $200,000 when working (age 21 and 60), and thenyou are going to live for the next 20 years with ωt = $0. Find the constant level ofconsumption C during years (21-80) that can be financed by your income (Interestrate is 5%). Find the level of savings St = ωt −C for periods t ≤60 and for t > 60
Unsystematic risk is not compensated in equilibrium because it can be eliminated for free through diversification. Select one: True False
The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and sells for $20.24 a share. What is the rate of return on this security? OA 5.95 percent B. 7.08 percent OC.8.40 percent OD. 11.90 percent OE 14.17 percent
The quarrying cost of marble and granite blocks plus delivery cost to the processing plant for each is P 2,400 per cubic meter. Processing cost of marble into tiles is P 200 per sq.m, and that of granite into tiles is P 600 per sq.m. If marble has a net yield of 40 sq.m. of tiles per cu.m. of block and sells at P 400 per sq.m., and granite gives a net yield of 50 sq.m. of tiles per cu.m. of block, and sells at P1,000 per sq.m., determine the more profitable material considering all other costs to be the same, and by how much?
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.1) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?2) Find A as a function of w.
I need help with question d
= 1. (i) A utility function has the form U(w) aw³ +bw² where a, b E R. Assuming w > 0 and a 0, is U(w) ever suitable for a non-satiated and risk-averse investor? If it is, state the range of values of w this holds for as a function of a and b. You must include your working. (ii) Give an example of a utility function with DARA. Show all your working. (iii) An investor has IRRA. Would this investor prefer a fair gamble or to do nothing? Provide a short explanation of your answer.
1.5