Consider a two period economy with a risk free asset yielding a net return r>0 in period 2 and an infinitely large number of risky assets each paying £1 with probability P:[0,1] and £0 with probability 1-p in period 2, Suppose that time realized return of each asset is independent of the return of the other assets, that investors are risk averse, and that the CAPM holds. Then A. All risky assets have the same price equal to p/(1+r) B. Each risky asset is priced as to yield an expected gross return larger than (1+r) C. The price of any risky asset in the first period is larger than p/(1+r) to reflect investors’risk aversion D. The price of any risky asset in the first period is larger than p/(1+r) to reflect systemic ris

Consider a two period economy with a risk free asset yielding a net return r>0 in period 2 and an infinitely large number of risky assets each paying £1 with probability P:[0,1] and £0 with probability 1-p in period 2, Suppose that time realized return of each asset is independent of the return of the other assets, that investors are risk averse, and that the CAPM holds. Then A. All risky assets have the same price equal to p/(1+r) B. Each risky asset is priced as to yield an expected gross return larger than (1+r) C. The price of any risky asset in the first period is larger than p/(1+r) to reflect investors’risk aversion D. The price of any risky asset in the first period is larger than p/(1+r) to reflect systemic ris

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 4MC

See similar textbooks

Similar questions

Suppose a world has two risky assets: StkC and StkD. The following table shows the holding period returns in each scenario. Suppose the T-bill rate is 3%. Scenario Probability Return for StkC Return for StkD Severe recession 0.03 -40% -12% Mild Recession 0.02 -10% 10% Normal 0.9 10% 6% Mild growth 0.02 20% 8% Boom 0.03 60% -20% Which answer is the closest value to the fifth-percentile value at risk (VaR) of holding StkC? -40% -10% 10% 20% 60%
Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.
An investor has an opportunity to invest in two risky assets and a risk-free asset. Theexpected return of the two risky assets are μ1 = 0.12, μ2 = 0.15. Their standarddeviations are σ1 = 0.05 and σ2 = 0.1, and the correlation coefficient between theirreturn is 0.2. The risk-free rate is 0.05. Suppose the investor has $1000 and he wantsto hold a portfolio with expected return of 0.1. If the investor is risk averse, how muchshould he invest in the two risky assets and the risk-free asset?
Suppose a world has two risky assets: StkC and StkD. The following table shows the holding period returns in each scenario. Suppose the T-bill rate is 3%. Scenario Probability Return for StkC Return for StkD Severe recession 0.03 -40% -12% Mild Recession 0.02 -10% 10% Normal 0.9 10% 6% Mild growth 0.02 20% 8% Boom 0.03 60% -20% Which answer is the closest value to the correlation between StkC and StkD?
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?
If the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm = 6.50%), what is the beta of Bank of America, BAC, if it has had a return of 9.14%? You must show all counts.
Suppose the risk-free rate is 5%. The expected return and standard deviation of a risky asset are 10% and 20%, respectively. a. What is the slope of the capital allocation line (CAL) constructed using the risk-free asset and the risky asset? A. 0.30 B. 0.15 C. 0.25 D. 0.20 b. If an investor has a risk aversion coefficient of A=2, what is the optimal fraction of the money that she invests in the risky asset? A. 62.5% B. 42.5% C. 30% D. 20% c. If an investor invest 25% of her money in the risky asset, which is the investor’s risk aversion coefficient? a. 5 b. 1 c. 3 d. 4
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
Calculate the required rate of return for an asset that has a beta of 1.01, given a risk-free rate of %3.4 and a market return of %9.1 . b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to %11.6, what is the required rate of return for the same asset? a. The required rate of return for the asset is enter your response here%. (Round to two decimal places.) Part 2 b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 11.6%, the required rate of return for the same asset is enter your response here%. (Round to two decimal places.)
Consider two assets with the following cash flow streams: Asset A generates $4 at t=1, $3 at t=2, and $10 at t=3. Asset B generates $2 at t=1, $X at t=2, and $10 at t=3. Suppose X=6 and the interest rate r is constant. Suppose r=0.2. Find the value X such that the present value of asset B is 12. Suppose the (one-period) interest rates are variable and given as follows: r01=0.1,r12=0.2, r23=0.3. Calculate the yield to maturity of asset A. (You can use Excel or ascientific calculator to find the solution numerically.)
Suppose that there are two assets: A and B. Asset A has expected return of 20%. B has expected return of 12% and standard deviation of σ* σ* = standard Deviation (σ) (a) “As B is strictly dominated by A in terms of total risk (standard deviation), there is no value in having B in portfolio formation.” (Without doing any calculation) (b) “If the correlation coefficient ρ between A and B = 1, it is always optimal to invest in A only.” (Show your proof) (c) “If the correlation coefficient ρ between A and B = -1, it is always optimal to invest in 50% in A and 50% in B when forming a minimum variance portfolio of the two.” (Show your proof) [ (d) “Given that σA= σB=σ*, it is always optimal to combine half of A and half of B when forming a minimum variance portfolio of the two when ρ ε (-1,1).” (Show your proof)
Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?