Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Question

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Answer 1

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

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COURSE: FINANCE LEVEL 2 Kappa Company is fully equity financed and has a cost of capital (WACC) = 11% per annum and is evaluating following projects: Project Name Beta Expected Return (%) W 0.27 22% X 0.35 10,2% Y 1.3 12,7% Z 2.7 24% Rate of return on Central Bank Bond is 9% per annum and expected market return is 14% per annum. a) Which projects have an expected return higher than cost of capital (WACC) Kappa of 11%? b) Which projects should be accepted? c) Which projects would be incorrectly accepted or rejected if company's total cost of capital were used as minimum acceptable rate of return?

Which investment project Alfa or Beta competing for funds is the best business decision (use the concepts of NPV and BEP): Suppose that project Alfa is financed by investor’s own funds of 150 (expected return 15%) and by bank loan of 100 at the rate of 10%. And project Beta is financed by investor’s own funds of 100 (expected return 15%) and by bank loan of 150 at the rate of 10%.

Which investment project Alfa or Beta competing for funds is the best business decision (use the concepts of NPV and BEP) (watch at screenshot-table):Suppose that project Alfa is financed by investor’s own funds of 150 (expected return 15%) and by bank loan of 100 at the rate of 10%. And project Beta is financed by investor’s own funds of 100 (expected return 15%) and by bank loan of 150 at the rate of 10%.

Answer 2

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 3

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 4

Question

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Expert Solution & Answer

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Answer 5

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 6

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 7

Chapter 8, Problem 8.30P

a)

Summary Introduction

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 8

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Answer 9

b)

Summary Introduction

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Answer 10

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Answer 11

c)

Summary Introduction

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Answer 12

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 13

d)

Summary Introduction

To discuss:

Calculation of the new required rate of return attributed to increased risk aversion.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 14

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 15

e)

Summary Introduction

To discuss:

Impact of the changes on the required rate of return.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Answer 16

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Answer 17

Expert Solution & Answer

Answer 18

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Answer 19

Ch. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQ Ch. 8.1 - Compare the following risk preferences: (a) risk...Ch. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQ Ch. 8.2 - Prob. 8.6RQ Ch. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQ Ch. 8.3 - How does international diversification enhance...

Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Solution Summary: The author explains the CAPM's relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

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Chapter 8 Solutions

Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

Solution Summary: The author explains the CAPM's relationship between the projected return for assets and systematic risk on the stocks.

To discuss: Required rate of return and the risk premium. Introduction: Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss: Graph on security market line. Introduction: The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss: Beta. Introduction: Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.

Want to see the full answer?

Chapter 8 Solutions

To discuss:

Required rate of return and the risk premium.

Introduction:

Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.

To discuss:

Graph on security market line.

Introduction:

The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.

To discuss:

Beta.

Introduction:

Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.