INTERMEDIATE FINANCIAL MANAGEMENT
12th Edition
ISBN: 9781305718265
Author: Brigham
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Chapter 3, Problem 2P
APT
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
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An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%.
a. Calculate the market risk premium.
b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.
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.
Chapter 3 Solutions
INTERMEDIATE FINANCIAL MANAGEMENT
Ch. 3 - Security A has an expected rate of return of 6%, a...Ch. 3 - The standard deviation of stock returns for Stock...Ch. 3 - APT
An analyst has modeled the stock of Crisp...Ch. 3 - Two-Asset Portfolio
Stock A has an expected return...Ch. 3 - Prob. 4PCh. 3 - Prob. 1MCCh. 3 - Prob. 2MCCh. 3 - Prob. 3MCCh. 3 - Prob. 4MCCh. 3 - Prob. 5MC
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- An analyst has modeled the stock of Crisp Trucking using a two-factor APTmodel. The risk-free rate is 6%, the expected return on the first factor (r1) is12%, and the expected return on the second factor (r2) is 8%. If bi1 5= 0.7 andbi2 5= 0.9, what is Crisp’s required return?arrow_forwardAn analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 5%, the expected return on the first factor (r₁) is 14%, and the expected return on the second factor (r2) is 8%. If bil 0.5 and bi2 = 0.8, what is Crisp's required return? Do not round intermediate calculations. Round your answer to one decimal place. % =arrow_forwardConsider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. (a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .arrow_forward
- Consider an asset with a beta of 1.2, a risk-free rate of 4.3%, and a market return of 12%. What is the reward-to-risk ratio in equilibrium? What is the expected return on the asset?arrow_forwardAssume that the expected rates of return and the beta coefficients of the alternatives supplied by an independent analyst are as follows: Security Estimated rate of returns Beta Nescom 5% 1.5 Market 4 1 Pk_Steel 3.5 0.75 T_Bills 3 0 Nawab 1 -0.6 What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear to be related to each alternative’s market risk? Is it possible to choose among the alternatives on the basis of the information developed thus far?arrow_forwardUse the basic equation for the CAPM to rework each of the following problems for above case. Case A) Find the required return for an asset with a beta of 0.9 when the risk-free rate and market return are 8% and 12% respectively. Case B) Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%. Case C) Find the market return for an asset with a required return of 16% and a beta of 1.1 when the risk-free rate is 9%. Case D) Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5% respectively.arrow_forward
- Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) = 14%; βi = 1.0.b. Recalculate the required rate of return assuming βi is 1.8.25. a. Compute the expected rate of return on investment i given the followinginformation: the market risk premium is 5%; Rf = 6%; βi = 1.2.b. Compute E(RM)arrow_forwardIf the beta of Asset A is 2.2, the risk free rate is 2.5%, and the expected return on Asset A is 8%, what is the expected return on the market (Note: you want to use CAPM)? Group of answer choices 7.28% 5.00% 8.00% 16.80%arrow_forwardAssume that there are two factors that price assets. Risk free rate is 4%. Factor 1 has anexpected return of 8% and factor 2 has an expected return of 10%. Calculate the expectedreturn for each asset with the following sensitivities using the Arbitrage Pricing Theory (APT). (a) β1 = 1.2, β2 = 0.9; (b) β1 = 1.5, β2 = −0.60;arrow_forward
- Use the required return-beta equation from the CAPM What is the required return if the risk-free rate is 4%, beta 1.5 and the expected market return 8%? What is the risk-free rate if beta is 1.1, the required return 8.4% and the expected market return 8%? What is beta if the risk-free rate is 4%, the required return 12% and the expected market return 8%? What is the expected market return if the risk-free rate is 4%, beta 1.5 and the required return 12%?arrow_forwardSuppose 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. 4arrow_forwardAnalyze investment M and investment J using the below. Scenario Probability M Return J Return Strong .30 18% 20% Normal .30 15% 12% Weak .40 9% 5% 1. What is the range for M? 2. What is the average exp. return for M ? 3. What is the standard deviation* M? 3.85 (given) 4. What is the CV for M? 5. What is the range for J? 6. What is the average exp. return for J? 7. What is the standard deviation J? 6.22 (given) 8. What is the CV for J? 9. Which is the better choice?arrow_forward
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