Q: Assume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei…
A: Variance: It indicates the spread of any data set. Variance is calculated by squaring the standard…
Q: 1. A security has an expected rate of return of 0.11 and has a beta (B) of 1.5. The risk-free rate…
A: 1) Expected return = 11% Beta = 1.5 Risk free rate (Rf) = 5% Market return (Rm) = 9%
Q: Complete the table below using CAPM model…
A: Given: Risk free rate = 10% Market rate = 18% Beta = 0.8
Q: What is kd of investment whose Beta is 1.4 and market premium is 8% while risk free rate is 5%?
A: Here kd of investment means cost of investment, therefore we need to calculate cost of investment…
Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…
A: Given that;Return on market portfolio is denoted by RM.Required return on stock A is RA and the…
Q: Based on the following probability distribution, what is the security’s expected return? State…
A: Calculate the expected return as follows: Expected return = Sum of product of (Probability *…
Q: Based on the following table, compute the reward-to-risk ratio for security Pearl if the risk-free…
A: Security Beta Expected return Pearl 0.9 17% Emerald 1.2 17%
Q: the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of…
A: The question is based on the concept of capital asset pricing model (CAPM) ,security market line and…
Q: The expected return on Kiwi computer is 16.6%. if the risk free is 4% and the expected return on…
A: Given: Expected return = 16.6% Risk free rate = 4% Expected return on market =10%
Q: What is the Variance of returns for Security XYZ? (no rounding off until the final answer, final…
A: Information OUTCOME PROBABILITY EXPECTED RETURN A 20% 20% B 80% 25%
Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…
A: Solution: As per the security market line following is the Rate of return for stock A and stock B…
Q: The betas are identical when the projected rate of return of a security and the market are both…
A: Beta is sensitivity of stock return with overall market rate of return.
Q: The risk-free security has a beta equal to ________ , while the market portfolio's beta is equal to…
A: Beta is a measure for analyzing the volatility of a portfolio in relation to overall 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: The beta of the risk free security is: a) 0 b) > 0 but < 1 c) 1 d) > 1
A: It is used in CAPM to measure the systematic risk or volatility of a security or a portfolio, in…
Q: Given the following probability distributions, what are the expected returns for the Market and for…
A: State Pr i rM rJ 1 0.3 −10% 40% 2 0.4 10 −20 3 0.3 30 30
Q: Compute the (a) expected return, (b) standard deviation, and (c) coefficient of variation for…
A: probability A return (return-expected return) (return-expected return)2 (return-expected return)2 x…
Q: Security A has the following probability distribution of returns: Scenario Probability Return 1…
A: Expected return =0.1 x 15+0.8×25+0.1×35 Expected return =1.5+20+3.5=25% Mean return =25%
Q: If standard deviation of security A is 27% and security B is 18%, the correlation coefficient…
A: Standard deviation of security A (sdA) = 27% Standard deviation of security B (sdB) = 18%…
Q: Security A has the following probability distribution of returns: Scenario Probability Return 1]…
A: The variance of security is a measurement of the dispersion of returns from the average return of…
Q: The beta of a risk-free security is _____ and the beta of the overall market is _____: a. 0; 1.…
A: Beta of risk free security Since does not fluctuate with or against the market, hence beta of risk…
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: Consider the following information (Assume that Security M and Security N are in the same financial…
A: Systematic risk is also known as non-diversifiable risk, and it exist for entire market. It arises…
Q: Based on the following probability distribution, what is the security's expected Expected Return…
A: Expected return of the security is calculated as the sum of the product of probability and…
Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation…
A: To know the riskiness between the two projects, Coefficient of variation gives good results. Higher…
Q: The beta of the risk-free asset is: 0.5 0.5 1.0 -1.0 2.0
A: In this question we need to tell the value of beta of risk free asset.
Q: Security A has an expected rate of return of 6%, a standard deviation ofreturns of 30%, a…
A: Beta coefficient: Beta coefficient measures the propensity of an assumed security’s anticipated…
Q: I asked this question (provided below) and was able to follow the response. I also got the same…
A: Thanks a lot for appreciating the earlier solution. I also appreciate your question. Let me help you…
Q: Calculate the (a) expected return, (b) standard deviation, and (c) coefficient of variation for an…
A: Expected return: It can be computed by taking the product of the probability of a specific payoff…
Q: Security A has an expected return of 7%, a standard deviation of returns of35%, a correlation…
A: Given data; 1) stock A expected return = 7% standard deviation = 35% correlation coefficient with…
Q: What is the expected return on asset A if it has a beta of 0.5, the expected market return is 13%,…
A: The expected return on the asset can be calculated as per capital asset pricing model.
Q: Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and…
A: In the given we need to analyze whether the security X is Under-valued or over-valued. For this we…
Q: MULTIPLE] Consider a single-factor model -conomy. Portfolio M has a beta of 1.0 on the actor and…
A: The arbitrage pricing hypothesis (APT) is a multifaceted resource evaluating model dependent on the…
Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…
A: Calculation of ratio of beta of A to beta of B: Answer: The ratio of beta A to beta B is 0.4286
Q: and the market risk premium (kM - KRF) is 2%. OShow your solutions and explain your answe Expected…
A: In this we need to calculate the required rate of return and compare with expected return on stock.
Q: The security market line has a slope equal to the a) Risk-free rate b) Market risk premium c)…
A: Security market line is the line shown on a graph that represents the relationship between the…
Q: If the dispersion around a security's return is larger * the standard deviation is smaller the…
A: Risk refers to probability of losses related to investment. In finance, Standard Deviation is used…
Q: What is the expected rate of return on a security with beta = 0? 2.
A: In the given question we need to answer what will be the expected rate of return on a security if…
Q: Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei…
A: Given:
Q: Suppose the market premium is 12%, market volatility is 20% and the risk-free rate is 6%. Suppose a…
A: Market risk premium (Mp) = 0.12 or 12% Risk free rate (Rf) = 0.06 or 6% Beta (b) = 0.8 Expected…
Q: Expected return of the X security is 12% and its standard deviation is 20%. Expected return of the Y…
A: Given information : Return X security 12% Return Y security 15% Standard deviation X security…
Q: The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According…
A: We need to compute the expected rate of return on security X according to Capital Asset pricing…
Q: What is the required return on an investment with a beta of 1.3 if the riskfree rate is 2.0 percent…
A: CAPM evolved as a way to measure this systematic risk. Sharpe found that the return on an individual…
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- The following data are available to you as portfolio manager: Security Estimated return (%) Beta A 40 3.0 B 35 2.5 C 30 1.0 D 17.5 1.8 E 20.0 1.5 Market Index 25 2.0 Government Security 17 0 In terms of the security market line, which of the securities listed above are underpriced? Assuming that a portfolio is constructed using equal proportions of the five securities listed above, calculate the expected return and risk of such a portfolioConsider a portfolio consisting of the below securities with the below characteristics: Security Amount Invested($) Beta Expected Return A 1,5 MIL 1.0 12.0%B 1.0 MIL 1.5 13.5%C 2.0 MIL 0.8 9.0% Required:a) Calculate the portfolio’s Beta. b) Calculate the portfolio’s expected return. c) Discuss the Capital Asset Pricing Model (CAPM) explaining what it is used forand which are its limitations.Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%
- The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model, the expected rate of return of a security, that you are interested in, has a beta of 1.25 would be equal to Calculate the expected rate of returnUsing CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.(a) Write the equation of the Security Market Line (SML). Compute and draw the SML when the expected return of the NASDAQ index (market portfolio) is 17% and the return to the risk-free asset is 7%. (b) Given the SML in (b), compute the beta and the expected return of the new share Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655. can you help with b
- a) Suppose the risk-free rate is `X'% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results. b) Using a graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model. Plot your answer from (a) onto this graph.1. Consider a Treasury bill with a rate of return of 1% and the following risky securities: Security A: E(r) =0.1; variance = 0.03; Security B: E(r) = 0.015; variance = 0.0225; Security C: E(r) = 0.07; variance = 0.04; Security D: E(r) = 0.25; variance = 0.25.The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________." A B C D 2. Security with normally distributed returns has an annual expected return of 10% and a standard deviation of 6%. The probability of getting a return between -1.76% and 21.76% in any one year is NOTE: All answers should be express in strictly numerical terms. For example, if the answer is 5%, write 0.05Help me with part E please. Thank you so much a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655. (d) Facebook pays a dividend of 5 GBP and the growth of dividends is equal to 4%for the first two years and then rise to 6%. Assuming constant cost of capitalas computed in point (c), estimate the price of the Facebook share. (e) Consider investing 20% of your wealth in the Facebook share with beta as in, What is the proportion you need to allocate to the Apple share with beta1.8 in order to replicate the market portfolio?
- Given that the formula for CAPM is Expected return= risk free rate + Beta*(Return on market - risk free rate), Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984. If these securities are assumed to be correctly priced, what is their risk free rate? Based on CAPM, what is the return on the market?Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0? How does expected return vary with beta?help me with part C please. thank you so much (a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655.