Question

Examples on Asset Pricing Models 25 (2-2)(RA) = 12.2%; EOR 1. You are given the following equilibrium expected returns and risks: 3.7 (RM-Red E(RA) = 12.2%; E(RB) = 15.5%; Ba=0.7; BB = 1.25. ER2=0.08 +0.06 Bi a. What is the equation of the Security Market Line? b. A portfolio, made up of A (above) and another security, has a beta of 1.10 and expected return of 13%. Which one would you rather buy - A alone or the portfolio? Why? Elr -14.61 3-1. 7 Oven VAL > BUY A Given the SML above, what is the maximum you will be willing to pay today for a stock that has a beta of 0.6, if the expected price next year is $48 and it is expected to pay dividends of $1.00 per share? (Ri): 11.6 . d. If investors become more risk averse, will the expected return for B be higher or lower than 15.5%? HIGHER c. 2. You are given the following information from a market in equilibrium: E(RA) = 15.6%; E(RB) = 12.4%; BA =1.2; BB = 0.8 a. What is the equation of the Security Market Line based on the CAPM? 2 (p =0 b. What is the equilibrium expected return on a portfolio created from 45% A O and 55% B. 13.84 4. c. The estimated expected on a stock C is 14%. If the beta of C is 1.3, is C overvalued or undervalued? Elza 16.9.7 146. = 7 ORV Auto d. Suppose the risk-free rate goes up by 1% (100 basis points), what will be the new expected return for A? ER:2 20.0738 Eira) 11.96. e. If the expected return on the market goes up by 1% (100 basis points) what will be the new expected return for A? ElRide 0.06 (0.15 0.06) ßi = 0.06 +0.oggi ElRad = 12.3%

please answer all them, i have enough questions left! ?

question #1 please :)

Answer 1

Answer for Question No.1

a. Equation of Security Market Line R_I = R_f +$\beta _{_{i}}$ (R_m - R_f)

where R_i = expected return on portfolio

R_f = Risk free return

R_m = expected return on market portfolio

$\beta _{_{i}}$ = index of systematic Risk

Calculation of Risk free rate

(12.2% - R_f)/0.7 = (15.5% - R_f)/1.25

(0.122 - R_f​​​​​​​) x 1.25 = (0.155 - R_f​​​​​​​) x 0.7

0.1525 - 1.25 R_f = 0.1085 - 0.7 R_f

R_f = (0.1525 - 0.1085)/0.55 = 0.08 = 8%

b. Calculation of Individual security expected return

Security A = 8 + 0.7 (12.2 - 8) = 10.94 %

Another security = 8 +1.1 (13 - 8) = 13.5%

Average return of the portfolio = (10.94 + 13.5)/2 = 12.22%

Since the Average return of the portfolio is more than expected return of Security A, hence it is preferable to but the portfolio.

c. Calculation of current price

Avg return = risk free +Beta ( expected return - risk free)

0.1222 = 0.08 + 0.6 (ER - 0.08)

0.1222 = 0.08 + 0.6ER - 0.048

0.1222 = 0.032 + 0.6ER = 0.15 = 15%

0.15 = (1+48-CP)/CP

1.15CP = 49 CP = 49/1.15 = 42.6

Maximum price for stock is $ 42.6

d. Calculation of expected return of Security B = 8 + 1.25(15.5-8) = 17.375%

it is higher than 15.5%.