4. Given a real rate of interest of 3.2%, an expected inflation premium of 5.1%, and risk premiums for investments A and B of7.4% and 8.9% respectively, find the following:a. The risk-free rate of return, r;b. The required returns for investments A and BReview OnlyClick the icon to see the Worked Solution.a. The risk-free rate of return is%. (Round to one decimal place.)b. The required return for investment A is%. (Round to one decimal place.)The required return for investment B is%. (Round to one decimal place.)

Answer a. The risk-free rate is the rate that accounts for inflation. Since the real rate of…

Click the icon to see the Worked Solution. a. The risk-free rate of return is %. (Round to one decimal place.) b. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.)

Click the icon to see the Worked Solution. a. The risk-free rate of return is %. (Round to one decimal place.) b. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13P

See similar textbooks

Related questions

Q: a. Calculate the NPV for investment A. Round to the nearest cent b. Calculate the NPV for investment…

A: solution NPV = present value of cash inflow – present value of cash outflow Discount rate given…

Q: Can I calculate the Rate of Return using the NPV/initial investment? Why or why not?

A: When an investment is made in a certain project, its future outcomes are measured based on the money…

Q: Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) =…

A: Expected rate of return is the minimum return which the investors would require for investing in a…

Q: Which of the following statements is correct? A. If the NPV of a project is greater than 0,…

A: Capital budgeting Capital budgeting is a concept where potential major projects or investments are…

Q: You are considering Project A, with the following information (Assume all statistics given are…

A: The Capital Asset Pricing Model (CAPM) explains the relative rate of return for an asset or project…

Q: Two assets, A and B, have the same expected return (10%) and the same level of risk (average). Which…

A: Investments are the funds that are invested or parked in some financial instruments or assets by…

Q: Course: Finance As a great investor, you are interested in 3 assets to invest: A, B and C. A…

A: Sharp ratio It is calculated as shown below. Sharp ratio=Expected return-risk free rateStandard…

Q: If you perform a NPV analysis on a perspective investment using a "d" = 15% and: a. the…

A: “Hi There, Thanks for posting the questions. As per our Q&A guidelines, must be answered only…

Q: Compute the expected rate of return on investment i, given the following information: Rf=9%;…

A: The expected rate of return refers to the minimum required rate by the investors for the investment.…

Q: whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their…

A: Average rate of return = Estimated average annual income/average investment Average investment =…

Q: The NPV for the best-case scenario will be $. (Round to the nearest dollar.) The NPV for the…

A: NPV is present value of inflow less present value of outflows. PV of inflows include pv of annual…

Q: Part A: Compute the expected return, standard deviation, and value at risk for the following two…

A: The expected value of an investment is the weighted average of all possible returns of the…

Q: Alternatives X and Y have rates of return of 10% and 18%, respectively. What is known about the rate…

A: It is not true that the highest rate of return always give a better investment result. The problem…

Q: Calculate the expected return. Do not round intermediate calculations. Round your answer to two…

A: The answers and the explanation can be seen below:

Q: For each of the cases shown in the following table, use the capital asset pricing model to find the…

A: CAPM is Capital Asset Pricing Model which considers the risk-free rate of return, Market return and…

Q: Compute the average rate of return for each investment. If required, round your answer to one…

A: 1a) Computation:

Q: Consider the following investments: Investment Expected return Standard deviation A…

A: Coefficient of Variation = Standard Deviation / Mean Prefer the Investment with lower Coefficient of…

Q: For investment A, the probability of the return being 20.0% is 0.5, 10.0% is 0.4, and -10.0% is 0.1…

A: Probability Return 0.5 20% 0.4 10% 0.1 -10%

Q: a. Compute the expected rate of return on investment i given the following information: the market…

Q: Based on the following probability distribution, what is the security's expected return? State…

A: Formula: Expected return = Specific probability * Specific return or pay off

Q: Consider an investment with the following probability distribution: Probability Payoff 0.40 30.0…

A: Probability is the expectation or estimate which is forecasted. For calculation of expected return,…

Q: I am struggling with this problem and getting it set up for excel.

A: Calculation of Expected Return and Standard Deviation:The expected return is 9.09% and standard…

Q: What is the (exact) nominal return on an investment that earns a real return of 14.7% while…

A: Solution:- Nominal rate of return means the rate of return inclusive the effect of inflation.

Q: Are the following statements true or false? Provide a short justification for vour answer. Suppose…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: We consider a one-step binomial tree in which the parameters are u = 1.2, d = 0.8, r = 0.12, T=…

A: The binomial tree depicts the intrinsic value of an option at various periods.

Q: Consider a two period economy with a risk free asset yielding a net return r>0 in period 2 and an…

A: The investors in the stock market have different approaches. Some investors are risk-takers, some…

Q: You have been given the following information: The required return of the market is 14.5% The risk…

A: This question has two parts. In the 1st part we need to Calculate the required rate of return. In…

Q: a. Calculate the required rate of return fo an asset that has a beta of 1.80, given a risk-free rate…

A: Using CAPM

Q: Suppose the risk-free rate is 5%. The expected return and standard deviation of a risky asset are…

A: Expected return (Re) = 10% Risk free rate (Rf) = 5% Standard deviation (SD) = 20%

Q: Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3,…

A: Honor code: Since you have posted a question with multiple sub-parts, we will solve the first three…

Q: . What is the internal rate of return for this investment?

A: Internal rate of return: it is that percentage of compound annual return that an investor or company…

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: ired: Compute the average rate of return for each investment. If required, round your answer to one…

A: The Net Present Value (NPV) is a financial analysis technique for assessing the viability of an…

Q: Incremental cash flow is calculated as (cash flowB− cash flowA), where B represents the alternative…

A: Incremental cash flows are the cash flows that are left after meeting initial cash requirements as…

Q: An advantage of the internal rate of return method is that a.it considers the time value of money.…

A: Capital budgeting is the process of selecting and choosing best alternatives among the available…

Q: Compute the residual risk measure for portfolio A. Round off your final answer to three digits after…

A: Residual Risk: The risk that is company-specific and can be diversified away is known as…

Q: Another name for the expected value of an investment would be: Answer a. The mean value b. The…

A: An Expected Value is an anticipated value for an investment at some point in future.

Q: a. Using net present worth analysis, calculate the rate of return for all four alternatives, and b.…

A: The methods stated above namely the net present worth analysis and the ROR analysis or rate of…

Q: b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate…

A: Capital asset pricing model is a relationship between systematic risk and its return. In simple…

Q: assume that risk free rate, RF, is currently 8%, the market return, 1m, is 12%, and asset a beta ba,…

A: Rf = 8% Rm = 12% Betas = 1.1 Betam = 1

Q: Use the basic equation for the CAPM to rework each of the following problems for above case. Case…

A: The Capital Asset Pricing Model (CAPM) describes the link between systematic risk and expected…

Q: a. Calculate the required rate of return for an asset that has a beta of 1.8, given a risk-free rate…

A: Investors have different options to make investments, and the motive behind investments is to…

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: a. Suppose an investor is appraising an investment under the following conditions: Forecast NPV Pi…

A: Given: Forecast Pi NPV 1 0.15 $30,000.00 2 0.15 $20,000.00 3 0.5 $15,000.00 4 0.2…

Q: Please calculate CAPM of Asset J with the following information: where, kj = required return on…

A: This question requires us to calculate required return on asset j as per Capital Asset Pricing Model…

Q: Which TWO of the following statements are correct for a potential project with an investment…

A: Capital Budgeting techniques are used to know the profitability of the project. The NPV and the IRR…

Question

4. Given a real rate of interest of 3.2%, an expected inflation premium of 5.1%, and risk premiums for investments A and B of
7.4% and 8.9% respectively, find the following:
a. The risk-free rate of return, r;
b. The required returns for investments A and B
Review Only
Click the icon to see the Worked Solution.
a. The risk-free rate of return is
%. (Round to one decimal place.)
b. The required return for investment A is
%. (Round to one decimal place.)
The required return for investment B is
%. (Round to one decimal place.)

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?
Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. The risk-free rate of return, rf The required returns for investments A and B
Given a real rate of interest of 2%, an expected inflation premium of 3%, and risk premiums for investments A and B of 4% and 6%, respectively, find the following. The risk-free rate of return, rf
(a) What is CAPM and what purposes does it serve in finance in general, and in investments in particular? Discuss (b) Outline and explain the main assumptions of CAPM. What limitations do these place on its practical application? Explain (c)The risk premium of the market portfolio is 9 %, the risk free rate is 5 % and the beta estimate for AELZ is β = 1.3. What is the risk premium? What is the expected rate of return?
The Treasury bill rate is 4.9%, and the expected return on the market portfolio is 11.1%. Use the capital asset pricing model. What is the risk premium on the market? (Enter your answer as a percent rounded to 1 decimal place.) What is the required return on an investment with a beta of 1.2? (Enter your answer as a percent rounded to 2 decimal places.) If an investment with a beta of 0.46 offers an expected return of 8.7%, does it have a positive NPV? If the market expects a return of 12.2% from stock X, what is its beta? (Round your answer to 2 decimal places.)
The Treasury bill rate is 3%, and the expected return on the market portfolio is 14%. According to the capital asset pricing model: a. What is the risk premium on the market?b. What is the required return on an investment with a beta of 1.8? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)c. If an investment with a beta of 0.8 offers an expected return of 8.2%, does it have a positive or negative NPV?d. If the market expects a return of 12.9% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Assume both portfolios A and B are well diversified, that E(rA) = 12.6% and E(rB) = 13.6%. If the economy has only one factor, and βA = 1 while βB = 1.2, what must be the risk-free rate? (Do not round intermediate calculations. Round your answer to 1 decimal place.)
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investments b1 b2 X 1.75 0.25 Y 1.00 2.00 Z 2.00 1.00 Assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills offer zero risk premium. a. According to the APT, what is the risk premium on each of the three stocks? b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? c. Suppose you buy $80 of X and $60 of Y and sell $40 of Z. What is the sensitivity of your portfolio to…
The Treasury bill rate is 6%, and the expected return on the market portfolio is 10%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.8 offers an expected return of 9.0%, does it have a positive or negative NPV? d. If the market expects a return of 11.0% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
In the following exercise, separate the investments according to the type of Keynesian demand they are: Transactions (0% to 5%), Precautionary (6% to 9%), and Speculative demand (greater than 10%). Investment in each category has the same risk. So you want to invest in the highest return for the same risk. Take each demand type and choose the highest return and put that amount into the investment. For example, if Bond fund A has a return of 4% and Fund B has a return of 5%, they have the same risk, so you would put $70 into bond fund B. You have the following investments Opportunities ad returns. Fidelity Bonds 11% Fidelity Magellan 9% Putman Bonds one 4% Putman bonds Two 12% Growth Stock One 15% Growth and Income 8% Income Fund 3% Putman Growth…
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Group of answer choices
Assume that both portfolios A and B are well diversified, that E(rA) = 20% and E(rB) = 15%. If the economy has only one factor, and BetaA = 1.3, whereas BetaB = 0.8, what must be the risk-free rate (write as percentage, rounded to two decimal places)?