Question

Question 17 1 pts Tommy is considering investing in either ABCD Corp.or DEFG Corp. ABCD Corp. has the expected return of 15% and has the beta of 1.6. DEFG Corp. has the expected return of 12% and has the beta of 1.2. Assuming the risk-free rate of 3.1%, which of the following is true? O ABCD Corp. has the lower reward-to-risk ratio than DEFG Corp., making it a better investment. O ABCD Corp. has the higher reward-to-risk ratio than DEFG Corp., making it a worse investment. O ABCD Corp. has the lower reward-to-risk ratio than DEFG Corp., making it a worse investment. ABCD Corp. has the higher reward-to-risk ratio than DEFG Corp., making it a better investment. Question 18 1 pts Assume ABC Corp.'s stock has the expected return of 18.53%. ABC Corp.'s beta is 1.73, and the current expected return of the market is 12.21%. What must the risk-free rate be according to the CAPM theory? 3.65% 3.42% 2.59% 3.55%

Answer 1

question 17:

D..ABCD corp has the higher reward -to - risk ratio than DEFG corp, making it a better investment.

risk reward ratio = (return - risk free rate) / beta.

for

ABCD = (15%-3.1%)/1.6

=>7.4375.

DEFG = (12-3.1)/1.2

=>7.4167.

question 18.

d.3.55%

let x be the risk free rate

as per capm,

required return = risk free rate + beta *(market return - risk free rate)

=>18.53 = x +1.73*(12.21-x)

=>18.53 = x +21.1233-1.73x

=>0.73x = 2.5933

=>x= 3.55%.