A stock has a beta of .75, the expected return on the market is 11 percent, and the risk-free rate is 4 percent.
a. What must the expected return on this stock be?
b. Draw the Security Market Line (SML) -be sure to label all relevant points-
c. Suppose the risk free rate falls to 3%. What is the expected return on this stock? Redraw the SML. How has the shape of the curve changed?
d. Suppose the expected return on the market is now 14 percent and the risk free rate is 4%. What is the expected return on his stock? Redraw the SML. How has the shape changed from the first graph you created?
A) We need to solve the CAPM equation to calculate the Expected return of the given stock:
B)
Asset | Beta | Return |
Risk Free (Rf) | 0 | 4.00% |
Market Portfolio (Rm) | 1 | 11.00% |
C | 0.75 | 9.25% |
Market portfolio always has a beta of 1 and the risk free rate is risk free so it has a beta of 0. Using these two points, we can plot the SML and using the expected return calculated for the stock in the previous part, we can calculate where it will lie on the SMP graph:
C) If the risk free return falls to 3% the expected return will be as follows:
Following is the SML graph:
We can see that if risk free return reduces to 3, the SML becomes steeper
D)
Following is the SML graph:
Again the SML has become steeper in comparison to how it was in part A
A stock has a beta of .75, the expected return on the market is 11 percent,...
Asset W has an expected return of 12.3 percent and a beta of 1.2. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Consider the relationship between portfolio expected return and portfolio beta. What is the slope of the security market line (SML)?
tock Y has a beta of 1.4 and an expected return of 17 percent. Stock Z has a beta of .7 and an expected return of 10.1 percent. If the risk-free rate is 6 percent and the market risk premium is 7.2 percent, the reward-to-risk and ratios for Stocks Y and Z are percent, respectively. Since the SML reward-to-risk is percent, Stock Y is and Stock Z is (Do not round intermediate calculations and enter your answers as a percent...
Stock Y has a beta of 1.4 and an expected return of 15.1 percent. Stock Z has a beta of.7 and an expected return of 8.6 percent. If the risk-free rate is 5 percent and the market risk premium is 6.5 percent, the reward-to-risk ratios for Stocks Y and Z are and percent, respectively. Since the SML reward-to-risk is percent, Stock Y is and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded...
Stock Y has a beta of 1.2 and an expected return of 14.5 percent. Stock Z has a beta of .7 and an expected return of 9.3 percent. If the risk-free rate is 5.6 percent and the market risk premium is 6.6 percent, the reward-to-risk percent, respectively. Since ratios for Stocks Y and Z are and the SML reward-to-risk is percent, Stock Y is and Stock Z is (Do not round intermediate calculations and enter your answers as a percent...
Stock X has a beta of 1.6 and an expected return of 18.2 percent. Stock Y has a beta of 1.19 and an expected return of 15.49 percent. What is the risk-free rate if these securities both plot on the security market line?
Stock X has a beta of 1.6 and an expected return of 19.33 percent. Stock Y has a beta of 1.21 and an expected return of 15.57 percent. What is the risk-free rate if these securities both plot on the security market line?
Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .80 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are 7.25 and ??????? percent, respectively. Since the SML reward-to-risk is 7.20 percent, Stock Y is undervalued and Stock Z is overvalued (Do not round intermediate calculations and enter...
A stock has a beta of 1.55, the expected return on the market is 16 percent, and the risk-free rate is 5.6 percent. What must the expected return on this stock be?
A stock has a beta of 13, the expected return on the market is 9 percent, and the risk- free rate is 3.6 percent. What must the expected return on this stock be?
A stock has a beta of 1.8, the expected return on the market is 5 percent, and the risk-free rate is 2 percent. What must the expected return on this stock be?