Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 25, Problem 2P
Summary Introduction
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?
An analyst has modeled the stock of Crisp Trucking using a two-factor APT
model. The risk-free rate is 5%, the expected return on the first factor (r₁)
is 14%, and the expected return on the second factor (r2) is 8%. If bil
0.5 and bi2 = 0.8, what is Crisp's required return? Do not round
intermediate calculations. Round your answer to one decimal place.
%
=
Chapter 25 Solutions
Financial Management: Theory & Practice
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_forwardAssume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.arrow_forwardSuppose 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.arrow_forward
- Consider an asset with a beta of 1.2, a risk-free rate of 4.3%, and a market return of 12%. What is the reward-to-risk ratio in equilibrium? What is the expected return on the asset?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
- What 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_forwardc. 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_forward
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