CORP FIN--CONNECT ONLY+PROCTORIO+180 DAY
12th Edition
ISBN: 9781266118562
Author: Ross
Publisher: MCG
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Security market line (SML) Assume that the risk-free rate, RF, is currently 8% and that the market return, rm, is
currently 15%.
a. Calculate the market risk premium.
b. Given the previous data, calculate the required return on asset A having a beta of 0.8 and asset B having a beta
of 1.9.
a. The market risk premium is ☐ %. (Round to one decimal place.)
b. If the beta of asset A is 0.8, the required return for asset A is %. (Round to one decimal place.)
If the beta of asset B is 1.9, the required return for asset B is
%. (Round to one decimal place.)
Risk and probability Micro-Pub, Inc., is considering the purchase of one of two digital cameras, R and S, each of
which requires an initial investment of $4,000. Management has constructed the following table of estimates of rates of
return and probabilities for pessimistic, most likely, and optimistic results:
a. Determine the range for the rate of return for each of the two cameras.
b. Determine the value of the expected return for each camera.
c. Which camera purchase is riskier? Why?
a. The range for the rate of return for camera R is
%. (Round to the nearest whole number.)
The range for the rate of return for camera S is ☐ %. (Round to the nearest whole number.)
b. The value of the expected return for camera R is
%. (Round to two decimal places.)
The value of the expected return for camera S is %. (Round to two decimal places.)
c. Which camera purchase is riskier? Why? (Select from the drop-down menus.)
The purchase of
is riskier because it has a
range for the rate of return.
4 analysts covered the stock of Flooring Chemical. One forecasts a 5% return for the coming year. The second expects the return to be -4%. The third predicts a return of 9%. The fourth expects a 1% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign probabilities of being correct of 33%, 7%, 18%, and 42%, respectively to the analysts' forecasts. Given these probabilities, what is Flooring Chemical's expected return for the coming year?
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