BFC is an agribusiness with a highly variable cash flow, but where the risks tend to be related to weather, commodity price cycles and other random factors not closely tied to the business cycle. Indeed, the correlation between the return on BFC equity and the return on the S&P 500 is just 0.3. However, the variance of the return on BFC’s equity is 12.25 times the variance of the return on the S&P 500. a) What is the CAPM beta coefficient for BFC equity? b) If the current risk-free rate is 3% and the expected return on the S&P 500 is 10.5%, what is the expected return on BFC equity according to CAPM?

BFC is an agribusiness with a highly variable cash flow, but where the risks tend to be related to weather, commodity price cycles and other random factors not closely tied to the business cycle. Indeed, the correlation between the return on BFC equity and the return on the S&P 500 is just 0.3. However, the variance of the return on BFC’s equity is 12.25 times the variance of the return on the S&P 500. a) What is the CAPM beta coefficient for BFC equity? b) If the current risk-free rate is 3% and the expected return on the S&P 500 is 10.5%, what is the expected return on BFC equity according to CAPM?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 1MC

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