Manipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems.a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively.b. Find the risk-free rate for a firm with a required return of 14.363% and a beta of 1.07 when the market return is 14%.C. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%.d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively.a. The required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively, is %. (Round to two decimal places.)

The capital asset pricing model describes the relationship between systematic risk and the expected…

Answered: Manipulating CAPM Use the basic…

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

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Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firm’s optimal capital structure, and what is the weighted average cost of capital at the optimal structure?
Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.65 when the risk-free rate and market return are 8% and 14%, respectively. b. Find the risk-free rate for a firm with a required return of 11.366% and a beta of 1.29 when the market return is 10%. c. Find the market return for an asset with a required return of 7.711% and a beta of 0.89 when the risk-free rate is 4%. d. Find the beta for an asset with a required return of 6.552% when the risk-free rate and market return are 6% and 8.4%, respectively.
Manipulating CAPM Use the basic epuation for the capital asset model (CAPM) to work each of the followig problems. a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively.b. Find the risk-free rate for a firm with a required return of 14.363% and a beta of 1.07 when the market return is 14%c. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively.
For each of the cases shown in the following table, use the capital asset pricing model to find the required return. case risk free rate market return beta A 5% 8% 1.30 B 8% 13% 0.90 C 9% 12% -0.20 D 10% 15% 1.00 E 6% 10% 0.60 (solve using excel)
Suppose you are given the following inputs for the Fama-Frech-3-Factor model. Required Return for Stock i: bi=0.8, kRF=8%, the market risk premium is 6%, ci=-0.6, the expected value for the size factor is 5%, di=-0.4, and the expected value for the book-to-market factor is 4%. Task: Estimate the required rate of return of this asset using the Capital asset pricing model and compare it with the Fama-French-3-factor model.
Assume for parts (a) to (h) that the Capital Asset Pricing Model holds. The marketportfolio has an expected return of 5%. Stock A’s return has a market beta of 1.5, anexpected value of 7% and a standard deviation of 10%. Stock B’s return has amarket beta of 0.5 and a standard deviation of 20%. The correlation between stockA’s and stock B’s return is 0.5.Required:a) Explain the term ‘capital asset pricing model.’b) What is the risk-free rate?c) What is the expected return on stock B?d) Draw a graph with expected return on the y-axis and beta on the x-axis. Indicate the approximate position of the risk-free asset, the market portfolio and stocks A and B on this graph. Draw the line, which connects these four points.e) Explain the term ‘Securities Market Line’, and what is the slope of the SML for this economy?f) Consider a portfolio with a weight of 50% in stock A and 50% in stock B. What are its variance and expected return?g) Where would under-priced and over-priced securities plot on…
What is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and 1. Interpret your result.
Within the context of the capital asset pricing model (CAPM), assume:∙ Expected return on the market = 15%∙ Risk-free rate = 8%∙ Expected rate of return on XYZ security = 17%∙ Beta of XYZ security = 1.25Which one of the following is correct?a. XYZ is overpriced.b. XYZ is fairly priced.c. XYZ’s alpha is −.25%.d. XYZ’s alpha is .25%. Please explain in detail the calculation
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Investment Beta Analyst's Estimated Return Stock X 2.3 15.5% Stock Y 1.2 13.6% Market Portfolio 1.0 11.5% Risk-free rate 4.0% What is the required rate of return for Stock X based on the capital asset pricing model (CAPM)?
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…
Within the context of the capital asset pricing model (CAPM), assume:∙ Expected return on the market = 15%∙ Risk-free rate = 8%∙ Expected rate of return on XYZ security = 17%∙ Beta of XYZ security = 1.25Which one of the following is correct?a. XYZ is overpriced.b. XYZ is fairly priced.c. XYZ’s alpha is −.25%.d. XYZ’s alpha is .25%.
Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: Stock A has and expected return of 22% and a beta of 2. Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. Q: Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.

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