EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 3.A, Problem A.4P

a)

Summary Introduction

To determine: The risk premium.

Introduction:

Risk premium is the difference of investment return and risk free rate of return.

b)

Summary Introduction

To determine: Security’s market price.

Introduction:

The price at which the goods or securities are sold in the market is market price.

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Expected return
a) Suppose the risk-free rate is 1% 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
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.

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EBK CORPORATE FINANCE

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