Consider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Question 1 Fill in the parts in the above table that are empty. Using the data generated in the previous question (Question 1); Plot the Security Market Line (SML) 2. Superimpose the CAPM’s required return on the SML % Return on T-Bills, Stocks, and Market Index State of the Economy Probability T- Bills Phillips Pay- up Rubber- made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive)
Consider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Question 1 Fill in the parts in the above table that are empty. Using the data generated in the previous question (Question 1); Plot the Security Market Line (SML) 2. Superimpose the CAPM’s required return on the SML % Return on T-Bills, Stocks, and Market Index State of the Economy Probability T- Bills Phillips Pay- up Rubber- made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 4P
Related questions
Question
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Consider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow.
Question 1
Fill in the parts in the above table that are empty.
Using the data generated in the previous question (Question 1);
- Plot the Security Market Line (SML)
2. Superimpose the
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% Return on T-Bills, Stocks, and Market Index |
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State of the Economy |
Probability |
T- Bills |
Phillips |
Pay- up |
Rubber- made |
Market Index |
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Recession |
0.2 |
7 |
-22 |
28 |
10 |
-13 |
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Below Average |
0.1 |
7 |
-2 |
14.7 |
-10 |
1 |
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Average |
0.3 |
7 |
20 |
0 |
7 |
15 |
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Above Average |
0.3 |
7 |
35 |
-10 |
45 |
29 |
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Boom |
0.1 |
7 |
50 |
-20 |
30 |
43 |
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Mean |
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Standard Deviation |
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Coefficient of Variation |
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Covariance with MP |
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Correlation with Market Index |
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Beta |
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CAPM Req. Return |
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Valuation (Overvalued/Undervalued/Fairly Valued) |
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Nature of stock (Aggressive/Defensive) |
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Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question
From the information generated in the previous two questions;
- Identify two investment alternatives that can be combined in a Assume a 50- 50 investment allocation in each investment alternative
- Compute the expected return of the portfolio thus formed
- Compute the portfolio’s Is the portfolio aggressive or defensive?
Solution
by Bartleby ExpertFollow-up Question
- Indicate which investments will plot on, above and below the SML?
- If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
Solution
by Bartleby ExpertKnowledge Booster
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