Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 6, Problem 21SP
Summary Introduction
To determine: The required return.
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Students have asked these similar questions
The risk-free rate is currently
3.3%,
and the market return is
14.8%.
Assume you are considering the following investments:
Investment Beta
A 1.54
B 1.16
C 0.51
D 0.11
E 2.14
.
a. Which investment is most risky? Least risky?
b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments.
c. Find the security market line (SML), using your findings in part
b.
d. On the basis of your findings in part
c,
what relationship exists between risk and return? Explain.
If the expected return on State Farm from
the Capital Asset Pricing
Model (the CAPM) is 0.20, and if the risk free rate of
interest is 0.05, and if the expected return on the
market portfolio is 0.20, then which of the following
comes closest to State Farm's beta?
A 0.50
B 1.50
C 0.00
D 1.00
What is the appropriate required return of CSB on this financial accounting question?
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
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- (Capital Asset Pricing Model) Breckenridge, Inc., has a beta of 0.79. If the expected market return is 10.0 percent and the risk-free rate is 6.0 percent, what is the appropriate expected return of Breckenridge (using the CAPM)? The appropriate expected return of Breckenridge is %. (Round to two decimal places.)arrow_forwardYour estimate of the market risk premium is 5%. The risk-free rate of return is 4%, and JB Hi Fi has a beta of 1.5. According to the Capital Asset Pricing Model (CAPM), what is its expected return? Select one: 1. 10.4% 2. 11.0% 3. 11.5% 4. 11.9%arrow_forwardFor each of the cases shown in the following table, use the capital asset pricing model (CAPM) to find the required return and explain your answer. Case Risk-free rate Market return Beta (%) (%) 8 A 5 1.3 В 8. 13 0.9 C 9 12 -0.2 D 10 15 1.0 E 10 0.6arrow_forward
- (Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 7.5 percent, and the expected return for the market is 10.5 percent. What should be the expected rate of return for each investment (using the CAPM)? Security A B C D Beta 1.62 1.02 0.71 1.34 a. The expected rate of return for security A, which has a beta of 1.62, is%. (Round to two decimal places.)arrow_forwardUse the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.65 when the risk-free rate and market return are 8% and 14%, respectively. b. Find the risk-free rate for a firm with a required return of 11.366% and a beta of 1.29 when the market return is 10%. c. Find the market return for an asset with a required return of 7.711% and a beta of 0.89 when the risk-free rate is 4%. d. Find the beta for an asset with a required return of 6.552% when the risk-free rate and market return are 6% and 8.4%, respectively.arrow_forwardYou estimate of the market risk premium is 7%. The risk-free rate of return is 3.1% and General Motors has a beta of 1.9. According to the Capital Asset Pricing Model (CAPM), what is its expected return?arrow_forward
- Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively. b. Find the risk-free rate for a firm witha required return of 14.363% and a beta of 1.07 when the market return is 14%. C. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%. d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively. a. The required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively, is %.arrow_forwarda) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your resultsarrow_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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