Question 2Suppose the yield on short -term government securities (perceived to be risk-free) is about4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using theCAPMa. What is the expected return on the market portfoliob. What would be the expected return on a zero-beta stock?c. Suppose you consider buying a share of stock at K40. The stock is expectedto pay a dividend of K3 next year and to sell then for K41. The stock risk hasbeen evaluated at Beta - -0.5. Is the stock overpriced or Under-priced?(show your workings)d. If the expected rates of return on Portfolio A and B are 11% and 14%respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill isat 6%, while the expected return of the S&P500 index is 12%. The standarddeviation of Portfolio A is 10% annually while that of B is 3196 and that of theIndex is 20%. If you currently hold a market index portfolio, would youchoose to add either of these portfolios to your holdings? Explain.e. Suppose shareholder equity invested in a utility is USs10omillion and theequity beta is o.6. if the treasury bill rate is 6% and the market risk premiumis 8%, what would be the expected annual profit by the Utility is the Utility.(note: Regulators allow utility firms to set prices at a level expected togenerate profits using the CAPM)

Question 2 Suppose the yield on short-term government securities (perceived to be risk-free) is about 4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the CAPM a. What is the expected return on the market portfolio b. What would be the expected return on a zero-beta stock?

Question 2 Suppose the yield on short-term government securities (perceived to be risk-free) is about 4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the CAPM a. What is the expected return on the market portfolio b. What would be the expected return on a zero-beta stock?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 2P: AA Corporations stock has a beta of 0.8. The risk-free rate is 4%, and the expected return on the...

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Problem 1 You are given the following information about stock X and the market portfolio, M: Riskless Asset (f) Stock X Market Portfolio (M) E(r) 0.04 (4%) ? 0.10 σ 0.00 0.30 0.20 You are not given the expected return of stock X. The correlation of the returns on the stock X and the market portfolio is equal to 0.4. a) What is the beta (6) of stock X? b) Assuming the CAPM holds, what is the expected return on stock X? c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300 in the market portfolio. What is the overall expected return, standard deviation and beta of this portfolio?
A) What expected return should an investor expect from investments in common stock? You are given the following information: Risk free rate of return = 4%; market risk premium = 11%; Beta of the stock (assume CAPM holds) = 0.72. B) Stock A with beta of 0.8 offers a 11% return while stock B with a beta of 1.2 offers a 15% return. What is the risk-free rate? What is the common market return? Assume CAPM holds.
Question: You are an investment advisor. You currently own two stocks, A and B, with the following characteristics: Expected Return Beta X 10% 0.8 Y 16% 1.5 The current risk-free rate is 2 percent, and the expected return on the market is 12 percent. How would you change your holdings of the two stocks (i.e., for each, would you sell or buy more)? Show your calculations (and explain). Stock A: Stock B:
Suppose you observe the following situation: Security Beta Expected Return E(R) Sara Corp 1.3 20% Dara Corp .8 14% Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market portfolio (Rm)?
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Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r4. The characteristics of two of the stocks are as follows: Correlation= Rate of return Stock Expected Return 7% 14% Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) O Yes O No Standard Deviation 30% 70% b. Could the equilibrium rybe greater than rate of return?
4) Assume rhat the risk-free rate is 5.5% and the market rate premium is 6%. A) What is the required retuen for the overal stock market? Round 2 decimal places B) what is the required rate of return on a stock with beta of 1.7? Round your answer 2 decimal places
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model: a. What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places.) b. What would be the expected rate of return on a stock with β = 0? (Round your answer to 2 decimal places.) c. Suppose you consider buying a share of stock at $47. The stock is expected to pay $3.5 dividends next year and you expect it to sell then for $49. The stock risk has been evaluated at β = –.5. Is the stock overpriced or underpriced? A. Underpriced B. Overpriced
Assume the risk-free rate is 3% and the market return is 10%. Stock X Stock Y Stock Z Beta 0.65 0.90 Current price $13.50 $26.50 Correlation (X/Y) = 0.35 (X/Z) = 0 (Y/Z) = 0.55 a) Most equity research concludes that Stock X is much more volatile compared to the “market". On average, Stock X's volatility is about 1.5 times that of the stock market. Based on CAPM, estimate the required return of Stock X. b) It is expected that Stock Y will pay a per share dividend of $0.43 one year from now, and the dividend will increase by an average of 6% per year in the foreseeable future. According to CAPM, is Stock Y overvalued or undervalued? c) Assume that Stock Z is fairly-priced today. Stock Z has just paid a dividend of $2. It is expected that its dividend will increase by 50% in the first year, 0% in the second year, 10% in the third year, and starting from the fourth year, the company will maintain the dividend growth rate to be 5% forever. How much would Stock Z be worth today if its…
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:a. What is the expected rate of return on the market portfolio?b. What would be the expected rate of return on a stock with β = 0?c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = −.5. Is the stock overpriced or underpriced?
Please show working Please answer ALL OF QUESTIONS 1 AND 2 1. Assume that the risk-free rate is 3.5% and the market risk premium is 8%. a. What is the required return for the overall stock market? Round your answer to two decimal places. __________ % b. What is the required rate of return on a stock with a beta of 2.4? Round your answer to two decimal places. __________ % 2. An individual has $50,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places._______
Assume that the risk-free rate of return is 4% and the market risk premium (i.e., Rm - Rf) is 8%. If use the Capital Asset Pricing Model (CAPM) to estimate the expected rate of return on a stock with a beta of 1.28, then this stock's expected return should be -- A) 10.53% B) 14.24% 23.15% 6.59%