Beta and CAPM Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer?

Beta and CAPM Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

In the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected excess return. (Assuming investors are risk-averse.) True or False?
Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf] Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate? A) zero B) 0.5 C) 1.0 D) its random
d. Would this asset be considered more or less risky than the market? The asset is a. Equally as risky the market portfolio, which has a beta of a. 1 b. less risky than b. 0 c. more risky than c. -1
Answer whether each of the following statements is correct and explain your argument. \ (a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.
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
(a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.
a. Calculate the required rate of return for an asset that has a beta of 1.19, given a risk-free rate of 2.7% and a market return of 8.9%. b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 12.1%, what is the required rate of return for the same asset?
A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.1. a. If the market return increased by 13%, what impact would this change be expected to have on the asset's return? b. If the market return decreased by 9%, what impact would this change be expected to have on the asset's return? c. If the market return did not change, what impact, if any, would be expected on the asset's return? d. Would this asset be considered more or less risky than the market?
You are a risk-averse investor. Would you therefore invest in financial assets that have a high or a low beta (b) coefficient? How high or low the beta coefficient should be in this case?
Compare and contrast the risk versus expected rate of return tradeoff, the security market line, and determination of beta on this basis. Include explanation of all the constituents, namely security market line, risk measure, expected rate of return, risk-free rate of return, and market rate of return. Include hypothetical examples for better clarity. What is the weighted average cost of capital (WACC) and its significance? 2. Can you think of two hypothetical examples for better clarity?
18. If one were to plot the expected returns of assets (y axis) against the systematic risk (x-axis) and construct a frontier of investments, then the indifference curves of a risk-neutral investor would: Select one or more: a. Would be straight horizontal lines b. Would be undefined and impossible to plot on such a diagram c. Would increase in utility as you go up along the y-axis d. Would be straight vertical lines e. Coincide over top the efficient frontier boundary at all points f. Would increase in utility as you go left along the x-axis
Suppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.