An investor's required rate of return is equal to: the risk premium the investor feels is necessary to compensate for the riskiness of the asset. the risk-free rate of interest plus a risk premium. the risk-free rate
Q: With the assistance of an annotated graph, explain when a security is overpriced, under-priced or…
A: The question is based on the concept of capital asset pricing model (CAPM) and security market line.
Q: Assume the market has the following assets: Asset Expected Return (%) Standard Deviation (%)…
A: Investors are three risk averse,risk NUETRAL and risk seeking.
Q: risk-taker (likes to take risks) type of investor prefer equities over fixed income?
A: Most of investors invest in the equity and like to take high risk and would invest in stock market.
Q: Evaluate the following statement: If CAPM (Capital Asset Pricing Model) holds, the expected return…
A: CAPM or Capital Asset Pricing Model is the formula that represents the relationship between the…
Q: If a security is underpriced (i.e., intrinsic value > price), then what is the relationship…
A: Intrinsic value of a security is the fair value based on the assessment of its fundamentals and…
Q: An increase in the riskiness of a particular security would NOT affect: Select one: A. The risk…
A: Investors have different options to make investments, and the motive behind investments is to…
Q: Which of the following is true of the cash payback period? a.the longer the payback, the longer the…
A: Payback period is the period under which the amount of investment is expected to be recovered.…
Q: Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for…
A: The capital asset pricing model (CAPM) refers to the model which tells us how the financial markets…
Q: Assets A and B have identical betas and standard deviations equal to 0% and 10%, respectively. Which…
A: Asset A and Asset B has the same beta Beta A = Beta B Standard Deviation of A = 0% Standard…
Q: When market rates of interest rise after a fixed-rate security is purchased, the value of the…
A: Held-to-maturity security:
Q: The desired rate of return on an investment should reflect the degree of risk involved. A. True…
A: Riskier investments may give higher returns to the investors as they provide favorable ratio of risk…
Q: Which of the following is not a characteristic of an efficient market? Investors can frequently…
A: Efficient Market Hypothesis is a hypothesis theory in finance which states that asset prices reflect…
Q: The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for…
A: Introduction : In simple words, capital asset pricing model or CAPM can be understood as a valuation…
Q: sk is the potential for an investment to generate more than one return. A security that will produce…
A: While investment there are potential risk to the investment due to which return realized vary…
Q: If an investor prefers investment with higher risk , regardless to the return then he is following…
A: Risk awareness strategy is defined as the raise in an understanding in the existence of the risks…
Q: True or False A.) If the annual increase in the cost to sell is higher than the required rate of…
A: Return is referred as the profit generated on the investment made. It comprises the change in the…
Q: What is the relation between the expected rate of return and the required rate of return as they…
A: In the world of finance in general and investments in particular we often look at a security’s…
Q: Compare long-term instruments and short-term risks, in terms of the various types of risk to which…
A: Interest rate risk is the likelihood that the value of a fixed-rate debt instrument may fall when…
Q: Whether the following statement is true or wrong. Briefly explain your answer. "It is impossible to…
A: The asset which has no risk associated with it is known as risk free asset. The return from risk…
Q: Assess the following statements: I. Default risk is the risk that a security issuer will default on…
A: The risk that a lender assumes in the event that a borrower is unable to make the required payments…
Q: According to the CAPM, the expected return of an asset that has just diversifiable risk and no…
A: As per CAPM, Expected Return = Rf + ( Beta * (Rm -Rf)) Rf = Risk free rate of return Rm = Market…
Q: iation of a security’s historical returns increases an investor’s underst
A: A standard deviation is a tool used in finance to measure the volatility and risk associated with a…
Q: According to the capital-asset pricing model (CAPM), a security's expected return is equal to the…
A: Capital Asset Pricing Model (CAPM) approach is a quantitative approach that helps in determining the…
Q: If investors speculate in derivative contracts rather than in the underlying asset, they will…
A: A derivative contract is a contract in which the value of the contract directly depends on the…
Q: Let rf be the risk free rate of interest. E[r e ] be the expected return of some risky asset.…
A: CAPM: CAPM is also called as Capital assets pricing model. Factors affecting CAPM return are risk…
Q: Determine how the appropriate yield to be offered on a security is affected by a higher risk-free…
A: Risk-free rate.:- The theoretical rate of return on a risk-free investment is known as the risk-free…
Q: Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate.…
A: The risk free asset will reflect an asset which has eliminated all the risk and which does not have…
Q: How is the value of a financial option affected by(a) the current price of the underlying asset, (b)…
A: If the price of the underlying stock increases, the price of a call option increases, and price…
Q: When you have a fixed investment horizon, it is important to maximize your earnings. You must…
A: An investor should take into consideration the risk and return associated with the security while…
Q: of investor prefer fixed income
A: Risk-Averse-: Some investor who is a Risk-Averse has the trait of inclining toward preventing loss…
Q: Market risk embodies the following risks except: O a. Financial. O b. Interest rate. Tax. O d.…
A: Market risk is a undiversified risk which cannot be controlled. It is a systematic risk that affects…
Q: Beta is defined as the: a. Amount of systematic risk in a risky asset relative to that in an…
A: Beta is an important concept in finance and important models such as capital asset pricing model…
Q: Explain what is the criterion used by a rational investor for choosing a financial investment in…
A:
Q: Define risk-free asset (in no more than 3 lines). [Hint: Focus on the features of the asset itself.]…
A: There are various options available for investment. Some of them provide high or good returns or…
Q: The expected return on a riskless asset is greater than zero due to? A. an expected return for taxes…
A: Expected rate of return is the profit or loss on the investor that is assumed to be anticipated by…
Q: Is the following statement true or false. Briefly explain your answer. “There can not be a…
A: Risk-free assets refers to financial assets which doesn’t carry any risk with return associated to…
Q: What type of security can be used to minimize both price risk and reinvestment riskfor an investor…
A: The term price risk refers to the increase or decrease in the price of the bonds as a result of…
Q: When adding a risky asset to a portfolio of may risky assets, which property of the asset has a…
A: Portfolios can consist of a variety of investments such as equities, bonds, commodities, cash and…
Q: Assume that a new law is passed which restricts investors to holding only one asset. A risk-averse…
A:
Q: Using a graph, explain when a security is overpriced, under-priced or fairly priced according to the…
A: The security market line (SML) is a graphical representation of the capital asset pricing model…
Q: Mike Piazza is asking you to tell him about the Capital Asset Pricing Model (CAPM). What will you…
A: To determine market behavior, the Capital Asset Pricing Model (CAPM) is used. The model is based on…
Q: Which of the following is TRUE? High-risk investments always have high returns If you invest in…
A: Risk refers to the negative outcome of the investment made or in other words, risk refers to the…
Q: When market rates of interest rise after a fixed-rate security is purchased, the value of the now…
A:
Q: (a) Define risk-free asset (in no more than 3 lines). [Hint: Focus on the features of the asset…
A: Because you have posted multiple questions, we will answer the first question only, for the…
- An investor's required
rate of return is equal to:- the risk premium the investor feels is necessary to compensate for the riskiness of the asset.
- the risk-free rate of interest plus a risk premium.
- the risk-free rate of interest.
- the risk-free rate of interest plus an inflation premium.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
- If a financial asset has an expected return that is greater than what is necessary to compensate for its risk, what will bring the return back in line with equilibrium?Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium that reflects the risk associated with changes in interest rates for a long-term security. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. It is calculated by adding the inflation premium to r*. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering…According to the capital-asset pricing model (CAPM), a security's expected return is equal to the risk-free rate plus a premium
- Explain the following three variables which influence the overall rate of return on alternative investments: The real risk-free rate of return The nominal risk-free rate of return The risk premium on the investmentWhich of the following statements describing the elements of intrinsic valuation is most accurate? a. A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best. b. The risk-free rate is the lowest rate that an investor can earn from short-term investments.c. When the present value of the cashflows is discounted with the appropriate rate end this present value is positive, then the asset providing these cashflows have a value to the investor. d.Cashflows may include depreciatipon expenses and amortization costs.What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
- What is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security?If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's historic behavior in his/her investing history. Why is Risk Aversion also called "price of risk"? Group of answer choices Risk Aversion measures the risk premium that the investor has required for the Capital Market Line Risk Aversion is determined by the excess return over the risk-free asset, as required by the investor Risk Aversion measures the difference in returns required by the investor in the Capital Allocation Line versus the Capital Market Line Risk Aversion measures the amount of return that the investor has required for each unit of risk taken None of the above
- An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnWhich of the following statements describing the elements of intrinsic valuation is most accurate? A.) When the present value of the cashflows is discounted with the appropriate rate and this present value is positive, then the asset providing these cashflows has a value to the investor. B.) The risk-free rate is the lowest rate that an investor can earn from short-term investments. C.) Cashflows may include depreciation expenses and amortization costs. D.) A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best.What type of security can be used to minimize both price risk and reinvestment riskfor an investor with a fixed investment horizon? Does this security protect the realpayoff? Explain.