Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM. To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

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Answer 1

Question

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

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Coronado Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi- purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours x (54,000+10,200)]. Estimated annual manufacturing overhead is $1,566,090. Thus, the predetermined overhead rate is $16.26 or ($1,566,090 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company's managers identified six activity cost pools and related…

Coronado Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi- purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours x (54,000+ 10,200)]. Estimated annual manufacturing overhead is $1,566,090. Thus, the predetermined overhead rate is $16.26 or ($1,566,090 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company's managers identified six activity cost pools and related…

Answer 2

Question

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

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Answer 3

Question

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

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Answer 4

Question

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

Answer 6

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.

Answer 7

Chapter 4, Problem 4.1C

To determine

Introduction: Expected return on the security would be the sum of risk free rates and the risk premium considering the risk factor. Expected return for any asset including security can be computed by using return generating models such as APT and CAPM.

To discuss: Capital Asset Pricing model using systematic & unsystematic risk, beta, relationship between risk & return and relationship of beta with respect to price of stock.

Answer 8

Expert Solution & Answer

Explanation of Solution

According to the CAPM model, there lies a relationship between risk and expected return from the portfolio or securities investment. CAPM is an abbreviation for Capital Asset Pricing model.

There are two types of risk involve in an investment namely systematic risk and unsystematic risk. Systematic risk is also represented as beta in CAPM model which refers to the risk that can be reduced by diversification whereas unsystematic risk is the risk that cannot be diversified or reduced.

The relationship between risk and return is directly proportional. As the risk increases the expected return also increases. The CAPM models can be expressed as follows:

Expected return=Rf+β(Rm−Rf)

The systematic risk can be avoided through diversification that is by combining less number highly risky securities with some of the less risky securities. It is difficult to avoid unsystematic risk.

The stock prices in the stock market changes according to the value of beta. If the beta value is 1 then it is said to be a perfect relation with stock market. If beta is greater than 1 then the change in stock price is greater than the change in stock market whereas if the beta is less than 1 then the change in stock prises will be smaller as compared to the market.