Required Rateof ReturnTH=13.0%2SML:+RPx bTAM 8.0%.TL=5.5%FRF = 3.0%Risk-FreeReturn, F0.5L's RiskPremiumMarket RiskPremium,RPM. AlsoStock A'sRisk PremiumH's RiskPremium1.522.5Beta CoefficientA movement from SML line 1 to 2 indicates that investors require acausing stock prices toHigher, FallHigher, RiseEven, HoldLower, FallLower, Risereturn,

Part 2: Explanation:Step 1: Understanding the Security Market Line (SML):The Security Market Line…

Answered: Required Rate of Return TH=13.0% 2…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b) Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)
Market Risk Pvemium = 7. Treasury Bill hate - 1.93 %3D GOOG - Alphabet Beta= 1.07 HO-Home Oepot- Beta 1.02 PG - Protector and Gamble= Beta- 0.45 MO- Altria Group - Beta- 0.65 CA-Catevpillar Inc. -Beta- 0.90
What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 25% SDA = 18% WA = 0.75 COVA, B = -0.0009 Select one: A. 13.65% B. 20 U ODN 20.0% C. 18.64% D. 22.5% Asset (B) E(R₂) = 15% SDB = 11% WB = 0.25
Capital Asset Pricing Model (CAPM) - Risk Free rate Risk free rate (Rf)* Beta (B)* 1.10 Market risk premium* 7.00% Expected return (ER) 10.20%
2. Assuming the following: Average Return (Risky Portfolio) 3.86% Standard Dev (Risky Portfolio) 10.56% Average Risk Free Rate 2.18% Return on Risk Free Asset Avg 4.15% Using the formula: E(rc)=rf + y* (E(rp) - rf) Solve for: 1. % of Risky Assets (y): 2. % of Risk Free Assets (1-y): Note: You wish to generate a 7% return for your complete portfolio E(rc)
Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) = 14%; βi = 1.0.b. Recalculate the required rate of return assuming βi is 1.8.25. a. Compute the expected rate of return on investment i given the followinginformation: the market risk premium is 5%; Rf = 6%; βi = 1.2.b. Compute E(RM)
3. Repeat the analysis of the slide 18 titled "Try The Formula" for a call with a strike of $110. Şe = $100 r=10% /What is the premium? Try the problem using the risk neutral probability; also try the problem using delta and B. u=2 d=1/2=0.5 %3D
Prob. of state S&P 500 Technology T-Bills -15% State International Fund + 1% GDP .25 8% 5% 30% + 2% GDP .50 12% 15% 15% + 3% GDP .25 16% 45% 5% 0%
Which asset in the following table has the most market risk (also known as systematic or non- diversifiable risk)? Asset A B Asset B Asset A Return Both Assets A and C Asset C (10% 12% 14% Beta 0.74 1.00 1.25 Standard Deviation 20% 40% 30%
Asset A has an expected return of 10%. The expected market return is 14% and the risk-free rate is 5%. What is asset A's beta? Select one: O a. 0.88 O b.0.67 O C. 0.55 O d.o.33 O e. 1.15
Given the utility function U = E(r) Ac€?o 0.5AA?A?2 and the fact that T-bill offer a risk-free rate of 4%, what is the minimum value for the risk-aversion coefficient A where an investor prefers the T-bills to an investment returning 10% with a standard deviation of 18%? (Hint: T-bills are risk-free)
Q. Market rate of return is 18%, risk-free rate of return 8% and beta is 1.2 1. Calculate the required rate of return 2. Calculate risk premium

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