Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 50P
Summary Introduction
To determine: The expected return as per the
Introduction:
Capital asset pricing model (CAPM) describes the relationship between the projected return for assets and systematic risk on the stocks. It is utilized to compute the required
Expected return refers to a return that the investors expect on a risky investment in the future.
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?
Suppose Autodesk stock has a beta of 2.17, whereas Costco stock has a beta of 0.71. If the risk-free interest rate is 6% and the expected return of the market portfolio is 11.5%, what is the expected return of a portfolio that consists of 65% Autodesk stock and 35% Costco stock, according to the CAPM?
The risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is the required rate of return on the stock, E(Ri)?
Use the CAPM equation.
Chapter 11 Solutions
Corporate Finance
Ch. 11.1 - What is a portfolio weight?Ch. 11.1 - How do we calculate the return on a portfolio?Ch. 11.2 - What does the correlation measure?Ch. 11.2 - How does the correlation between the stocks in a...Ch. 11.3 - Prob. 1CCCh. 11.3 - Prob. 2CCCh. 11.4 - Prob. 1CCCh. 11.4 - Prob. 2CCCh. 11.4 - Prob. 3CCCh. 11.5 - What do we know about the Sharpe ratio of the...
Ch. 11.5 - If investors are holding optimal portfolios, how...Ch. 11.6 - When will a new investment improve the Sharpe...Ch. 11.6 - Prob. 2CCCh. 11.7 - Prob. 1CCCh. 11.7 - Prob. 2CCCh. 11.8 - Prob. 1CCCh. 11.8 - According to the CAPM, how can we determine a...Ch. 11 - You are considering how to invest part of your...Ch. 11 - You own three stocks: 600 shares of Apple...Ch. 11 - Consider a world that only consists of the three...Ch. 11 - There are two ways to calculate the expected...Ch. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Suppose two stocks have a correlation of 1. If the...Ch. 11 - Arbor Systems and Gencore stocks both have a...Ch. 11 - Prob. 11PCh. 11 - Suppose Avon and Nova stocks have volatilities of...Ch. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 15PCh. 11 - Prob. 16PCh. 11 - What is the volatility (standard deviation) of an...Ch. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Suppose Ford Motor stock has an expected return of...Ch. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - A hedge fund has created a portfolio using just...Ch. 11 - Consider the portfolio in Problem 27. Suppose the...Ch. 11 - Prob. 29PCh. 11 - Prob. 30PCh. 11 - You have 10,000 to invest. You decide to invest...Ch. 11 - Prob. 32PCh. 11 - Prob. 33PCh. 11 - Prob. 34PCh. 11 - Prob. 35PCh. 11 - Prob. 36PCh. 11 - Assume all investors want to hold a portfolio...Ch. 11 - In addition to risk-free securities, you are...Ch. 11 - You have noticed a market investment opportunity...Ch. 11 - Prob. 40PCh. 11 - When the CAPM correctly prices risk, the market...Ch. 11 - Prob. 45PCh. 11 - Your investment portfolio consists of 15,000...Ch. 11 - Suppose you group all the stocks in the world into...Ch. 11 - Prob. 48PCh. 11 - Consider a portfolio consisting of the following...Ch. 11 - Prob. 50PCh. 11 - What is the risk premium of a zero-beta stock?...
Knowledge Booster
Similar questions
- You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of return on Stocks X and Y? c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forwardUse the expected return-beta equation from the CAPM. What is the expected return for a stock if the risk-free rate is 4%, beta 0.9 and the expected return for the market portfolio is 6%?arrow_forwardSuppose the risk-free return is 2% and the market portfolio has an expected return of 12% and a volatility of 16%. Merck & Co. (Ticker: MRK) stock has a 25% volatility and a correlation with the market of 0.8. What is Merck’s beta with respect to the market? Under the CAPM assumptions, what is its expected return?arrow_forward
- Suppose the market risk premium is 9 % and also that the standard deviation of returns on the market portfolio is 0.26 . Further assume that the correlation between the returns on ABX (Barrick Gold) stock and returns on the market portfolio is 0.62 , while the standard deviation of returns on ABX stock is 0.36 . Finally assume that the risk-free rate is 2 %. Under the CAPM, what is the expected return on ABX stock? (write this number as a decimal and not as a percentage, e.g. 0.11 not 11%. Round your answer to three decimal places. For example 1.23450 or 1.23463 will be rounded to 1.235 while 1.23448 will be rounded to 1.234)arrow_forwardBased on the CAPM model, what should be the expected return for a stock with a beta of 2.1 when the risk-free rate is 2.5% and the market risk premium is 8.5%?arrow_forwardSuppose the market portfolio has an expected return of 9% and a volatility of 18.5%. YMH stock return has a 22% volatility and a correlation with the market return of 0.74. If the risk-free rate is 1% and the CAPM holds, what is the Sharpe ratio of the YMH stock? O 0.32 0.384 O 0.2944 O 0.3648arrow_forward
- The expected return on the Market Portfolio M is E(RM)=15%, the standard deviation is sM=25% and the risk-free rate is Rf=5%. a. Suppose that stock X has standard deviation sX=30%, and correlation with the market portfolio rXM=0.5. Compute bX and E(RX) (the beta and the expected return of stock X) according to the Market Model (ie: alpha equals zero under the Market Model). b. Suppose that stock Y has standard deviation sy=15%, and correlation with the market portfolio rYM=-0.1. Compute bY and E(RY) (the beta and the expected return of stock Y) according to the Market Model (ie: alpha equals zero under the Market Model). c. Compute the beta of a portfolio composed 65% of stock X and 35% of stock Y.arrow_forwardStock A's stock has a beta of 1.30, and its required return is 15.75%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)arrow_forwardSuppose the risk-free return is 3.5% and the market portfolio has an expected return of 11.9% and a volatility of 12.9% Merck & Co. (Ticker: MRK) stock has a 20.8% volatility and a correlation with the market of 0.065. a. What is Merck's beta with respect to the market? b. Under the CAPM assumptions, what is its expected return?arrow_forward
- Suppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.arrow_forwardSuppose that the risk-free rate r, = 0.03, the expected market return uM = 0.11, and the market volatility oM = 0.16. Stock A has beta = 1.2 and diversifiable risk o̟ = 0.08. Stock B has beta = 0.8 and 0, = 0.03. Stock C has beta = 1.5 and o̟ = 0.1. Consider a portfolio P which is 45% in Stock A, 25% in Stock B, and 30% in Stock C. (a) Find the value of beta for this portfolio. (b) Assuming CAPM, find the portfolio's expected return µp. (c) Find the standard deviation of the portfolio's systematic (or mar- ket) risk. (d) Find the standard deviation o, of the diversifiable risk of P. (You may assume that the diversifiable risks of A,B, and C are uncorrelated.)arrow_forwardUse the expected return-beta equation from the CAPM. What is the expected return for a stock if the risk-free rate is 4%, beta 0.9 and the expected return for the market portfolio is 6%? What is the risk-free rate if beta is 1.1, the expected return 6.3% and the expected return for the market portfolio is 6%? What is beta if the risk-free rate is 4%, the expected return 11% and the expected return for the market is 6%? What is the expected return for the market if the risk-free rate is 4%, beta 0.9 and the expected return 11%?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning