A.1. The table here shows the no-arbitrage prices of securities A and B that we calculated. Cash Flow in One Year Market Price Today Security Security A Security B Weak Economy Strong Economy 231 600 346 600 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this pertfolio? What expected return will you earn from holding CSCSmarker price of this portfolio? What expected return will you earn from holding this portrli A.2. Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy is strong. The risk-free interest rate is 4%. a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1? b. What is the no-arbitrage price of security C? c. What is the expected return of security C if both states are equally likely? What is its risk premium? d. What is the difference between the return of security C when the economy is strong and CS bamoeaner AHo| e. If security C had a risk premium of 10%, what arbitrage opportunity would be available? 1t

A.1. The table here shows the no-arbitrage prices of securities A and B that we calculated. Cash Flow in One Year Market Price Today Security Security A Security B Weak Economy Strong Economy 231 600 346 600 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this pertfolio? What expected return will you earn from holding CSCSmarker price of this portfolio? What expected return will you earn from holding this portrli A.2. Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy is strong. The risk-free interest rate is 4%. a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1? b. What is the no-arbitrage price of security C? c. What is the expected return of security C if both states are equally likely? What is its risk premium? d. What is the difference between the return of security C when the economy is strong and CS bamoeaner AHo| e. If security C had a risk premium of 10%, what arbitrage opportunity would be available? 1t

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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The table here shows the no-arbitrage prices of securities A and B that we calculated.Cash Flow in One YearSecurity Market Price Today Weak Economy Strong EconomySecurity A 231 0 600Security B 346 600 0a. What are the payoffs of a portfolio of one share of security A and one share of security B?b. What is the market price of this portfolio? What expected return will you earn from holdingthis portfolio Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy isstrong. The risk-free interest rate is 4%.a. Security C has the same payoffs as which portfolio of the securities A and B in problem A-1?b. What is the no-arbitrage price of security C?c. What is the expected return of security C if both states are equally likely? What is its riskpremium?d. What is the difference between the return of security C when the economy is strong and when itis weak?e. If security C had a risk premium of 10%, what arbitrage opportunity would be available?
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Co. 1.39 0.153 What is the risk - free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Risk - free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. % Repete Co. %
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Col 1.39 0.153 What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places) Risk-free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. Repete Co.%
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1. You are trying to plan your investments for the next year. You havedecided that the market will either be strong (a bull market), weak (abear market) or normal. You think that stocks, bonds, and bills will earn the following retruns in these secnarios:You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities?(b) What is the volatility of each security return?(c) What is the covariance between stock and bond returns?
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's Stock CAPM Elements Value Risk-free rate (rRFrRF) Market risk premium (RPMRPM) Happy Corp. stock’s beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.’s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst’s prediction. Happy Corp.’s new required rate of return is . Tool tip: Mouse over the points on…
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
Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. For graph see image 13a CAPM Elements Value Risk-free rate (rRFRF) Market risk premium (RPMM) Happy Corp. stock’s beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.’s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst’s prediction. Happy Corp.’s new required rate of return is _____?. For grapgh see image 13b The SML helps determine the level of risk aversion among investors.…
Hi, How do i solve this problem using a formula or financial calculator? Two securities, A and B, are available for trading. Prices (at t=0) and future payoffs (at t=1) in bothstates are given in the following table. Assume that both states are equally likely (50% chance of each). There is another security, call it C, whose payoff at t=1 is equal to $300 in the weak state and$600 in the strong state. Find the no-arbitrage price (at t=0) of security C What is the risk-free rate of return in this economy?