b) Two securities have the following current prices and payoffs in two equally likely states of nature at the end of the year Payoff (£) Security State 1 State 2 Current price А 10 20 8.1 30 10 9.2 Answer the following: i) What is the one-period risk-free interest rate? (show all the details of your calculation) ii) Suppose now that there are three states of nature and two securities. Discuss the possibility of finding a risk-free portfolio in this scenario.

b) Two securities have the following current prices and payoffs in two equally likely states of nature at the end of the year Payoff (£) Security State 1 State 2 Current price А 10 20 8.1 30 10 9.2 Answer the following: i) What is the one-period risk-free interest rate? (show all the details of your calculation) ii) Suppose now that there are three states of nature and two securities. Discuss the possibility of finding a risk-free portfolio in this scenario.

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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Consider the following data for two risk factors (1 and 2) and two securities (J and L):λ0 = 0.07 λ1 = 0.04 λ2 = 0.06bJ1 = 0.10 bJ2 = 1.60 bL1 = 1.80 bL2 = 2.45a. Compute the expected returns for both securities. b. Suppose that Security J is currently priced at $50 while the price of Security L is $15.00.Further, it is expected that both securities will pay a dividend of $0.95 during the coming year.What is the expected price of each security one year from now? c. Compute the correlation between stock A and stock B considering the following data.Standard deviation of stock A = 10 percentStandard deviation of stock B = 17 percentCovariance between the two stocks = 90.
Suppose you observe the following situation on two securities:Security Beta Expected Return Pete Corp. 0.8 0.12 Repete Corp. 1.1 0.16 Assume these two securities are correctly priced. Based on the CAPM, what is the return on the market?
assume that the market consists of two securities. Security A has a market value of $1 billion and a covariance with the market portfolio of 0.15. Security B has a market value of $3 billion and a covariance with the market portfolio of 0.08. What is the standard deviation of the market portfolio?
Suppose you observe the following situation: Security Ruby Pearl Expected Return 14.9% 21.0% Beta 0.70 2.13 A). If these two securities are correctly priced, calculate the risk-free rate. Round your answer to 4 decimal points. B). If these two securities are correctly priced, find the market risk premium (using the findings of Requirement-A). Round your answer to 4 decimal points. C). If the current market data shows that the risk-free rate is 3.52 percent, are these securities fairly priced? Comment on your answer. Round your answers to 4 decimal points. D). Calculate the expected return and beta of an equally weighted portfolio of these two securities. Round your answers to 3 decimal points.
The following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%. Security N O P Return 20 21 23 Beta 1.2 1.8 0.82 Calculate the market risk premium, and the expected return of each asset using CAPM.
Consider two securities, A and B, whose standard deviations of returns and betas are given below: Security A Security B Standard deviation 15% 25% Beta 1.30 0.75 Which security will have the higher risk premium? Security A or B?
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.%
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. %
Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984 - these securities are assumed to be correctly priced. Based on CAPM, what is the return on the market?
Question: There are three securities in the market. The following chart shows their possible payoffs: &n... Edit question There are three securities in the market. The following chart shows their possible payoffs: State Probabilityof Outcome Return on Security 1 Return on Security 2 Return on Security 3 1 .14 .199 .199 .049 2 .36 .149 .099 .099 3 .36 .099 .149 .149 4 .14 .049 .049 .199 a-1. What is the expected return of each security? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Answer 12.40% a-2. What is the standard deviation of each security? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Answer 4.50% b-1. What are the covariances between the pairs of securities? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your…
The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?
Given that the formula for CAPM is Expected return= risk free rate + Beta*(Return on market - risk free rate), Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984. If these securities are assumed to be correctly priced, what is their risk free rate? Based on CAPM, what is the return on the market?

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