Bundle: Financial Management: Theory & Practice, 16th + MindTap, 1 term Printed Access Card
16th Edition
ISBN: 9780357252673
Author: Brigham, Eugene F., EHRHARDT, Michael C.
Publisher: Cengage Learning
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Chapter 25, Problem 2P
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Determine: Crisp’s required
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An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
An analyst has modeled the stock of Crisp Trucking using a two-factor APTmodel. The risk-free rate is 6%, the expected return on the first factor (r1) is12%, and the expected return on the second factor (r2) is 8%. If bi1 5= 0.7 andbi2 5= 0.9, what is Crisp’s required return?
Suppose you are given the following inputs for the Fama-Frech-3-Factor model. Required Return for Stock i: bi=0.8, kRF=8%, the market risk premium is 6%, ci=-0.6, the expected value for the size factor is 5%, di=-0.4, and the expected value for the book-to-market factor is 4%.
Task: Estimate the required rate of return of this asset using the Capital asset pricing model and compare it with the Fama-French-3-factor model.
Chapter 25 Solutions
Bundle: Financial Management: Theory & Practice, 16th + MindTap, 1 term Printed Access Card
Ch. 25 - Define the following terms, using graphs or...Ch. 25 - Prob. 2QCh. 25 - The standard deviation of stock returns for Stock...Ch. 25 - Prob. 2PCh. 25 - Stock A has an expected return of 12% and a...Ch. 25 - Prob. 4PCh. 25 - Prob. 7SPCh. 25 - Prob. 1MCCh. 25 - Prob. 2MCCh. 25 - Prob. 3MC
Ch. 25 - You have been hired at the investment firm of...Ch. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 6MCCh. 25 - You have been hired at the investment firm of...Ch. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 9MCCh. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 11MC
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- APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?arrow_forwardConsider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .arrow_forwardUse the basic equation for the CAPM to rework each of the following problems for above case. Case A) Find the required return for an asset with a beta of 0.9 when the risk-free rate and market return are 8% and 12% respectively. Case B) Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%. Case C) Find the market return for an asset with a required return of 16% and a beta of 1.1 when the risk-free rate is 9%. Case D) Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5% respectively.arrow_forward
- Suppose the risk-free rate is 5%. The expected return and standard deviation of a risky asset are 10% and 20%, respectively. a. What is the slope of the capital allocation line (CAL) constructed using the risk-free asset and the risky asset? A. 0.30 B. 0.15 C. 0.25 D. 0.20 b. If an investor has a risk aversion coefficient of A=2, what is the optimal fraction of the money that she invests in the risky asset? A. 62.5% B. 42.5% C. 30% D. 20% c. If an investor invest 25% of her money in the risky asset, which is the investor’s risk aversion coefficient? a. 5 b. 1 c. 3 d. 4arrow_forwardWe consider a one-step binomial tree in which the parameters are u = 1.2, d = 0.8, r = 0.12, T = 0.25, fu = 3, fa = 0. Evaluate the followings: (1) Calculate the probability p of an up movement in a risk-neutral world. (2) Compute the current price f.arrow_forwardThe market has three risky assets. The variance-covariance matrix of the risky assets are as follows: r1 r2 r3 r1 0.25 0 -0.2 r2 0 4 0.1 r3 -0.2 0.1 1 Assume the market portfolio is M = 0.2 ◦ r1 + 0.5 ◦ r2 + 0.3 ◦ r3. Further assume E(rM) = 0.08. (1) What is the variance of M?(2) What is the covariance of r2 and M?(3) What is β2?(4) If the rate of return of the risk-free asset is 0.02. Then what is the fair expected rate of return of security 2?(5) An investor wants to invest in a portfolio P = 0.4◦r1+0.6◦r3. What is its “fair” expected rate of return?arrow_forward
- An analyst has modeled the stock of Brown Kitchen Supplies usinga two-factor APT model. The risk-free rate is 5%, the requiredreturn on the first factor (r1) is 10%, and the required return on thesecond factor (r2) is 15%. If bi1 5 0.5 and bi2 5 1.3, what is Brown’srequired return? (20.5%)arrow_forwardWhat is the required return on an investment with a beta of 1.3 if the riskfreerate is 2.0 percent and the return on the market is 8.1 percent? If the expected return on the investment is 11.2 percent, what should you do?arrow_forwardI need to calculate the cost of equity with the following data: The current appropriate risk-free rate is 6% and the return on the market is 13.5%. levered beta is 1.29. Using the CAPM, estimate DE’s cost of equity. Be sure to state any additional assumptionsarrow_forward
- c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficient with the market of .28 and a variance of .3285. According to the capital asset pricing model, what is the expected return on Portfolio Z?arrow_forwardTwo assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.arrow_forwardPuji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8. Is there a market premium or market discount? Justify your answer. Determine the required return of assets J and K. Show your solutions. Interpret your answer. Graph the Security Market Line for both assets. Between assets J and K, can you determine which has more total risk and which has more market risk? Determine which stock has a higher cost of equity capital. If you are the financial consultant of PIFC, what will be your investment strategy?arrow_forward
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