Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Question

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Answer 1

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

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Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table ITEM RATE OF RETURN BETA Risk-free asset 9% 0.0 Market portfolio 14% 1.0 Project A - 1.5 Project B - 0.75 Project C - 2.00 Project D - 0.0 Project E - -0.50 Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk. Use your findings in part a to draw the security market line (required rate of return relative to nondiversifiable risk) Discuss the relative nondiversifiable risk of projects A through E. Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline to 12%. Calculate the new required returns fcor assets A through E and draw the new security market line on the same graph you drew for b. Compare your findings…

Review the table below listing performance metrics for selected assets. The metrics are defined in the same way as in CAPM Return risk beta riskless asset 4% 0% 0 Market Portfolio 9% 24% 1 Fund A 8% 33% 0.4 Fund B 11% 30% 1.5

Investment Alternatives Corn Belt (1) Central Valley (2) Great Plains (3) Exp. Return ri =0.14 r2=0.12 r3=0.07 Std. Dev. 01=0.08 02=0.05 03=0.01 Weight in Portfolio Wi=1/3 W2=1/3 W3=1/3 Correlation Among Investment 1 and 2 (p12)= 0.30 1 and 3 (p13) = -0.40 2 and 3 (p23) = -0.10 %3D Portfolio Data for Financial Servicing Analysis Under Risk a. Calculate the expected return of the portfolio. b. Calculate the variance and the standard deviation of the portfolio. c. Calculate the variance and standard deviation of the portfolio assuming that the correlation among the investments is all equal to 0.

Answer 2

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 3

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 4

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 5

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 6

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 7

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 8

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Answer 9

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Answer 10

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Answer 11

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Answer 12

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 13

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 14

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 15

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 16

Expert Solution & Answer

Answer 17

Expert Solution & Answer

Answer 18

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Answer 19

Ch. 8.1 - Prob. 1FOE Ch. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQ Ch. 8.1 - Prob. 8.3RQ Ch. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQ Ch. 8.2 - Prob. 8.6RQ Ch. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQ

Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Solution Summary: The author explains the CAPM's relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Want to see the full answer?

Chapter 8 Solutions

Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Solution Summary: The author explains the CAPM's relationship between the projected return for assets and systematic risk on the stocks.

To discuss: Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss: Graph on security market line. Introduction: The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss: Beta. Introduction: Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Want to see the full answer?

Chapter 8 Solutions

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.