Homework Answers
Answer:-
Q 3) Taking CAPM into consideration
The scenarios b and c are justified whereas a and d are not possible.
a) If we consider A and B the standard deviations (SD) are 30 and 25 and expected return are 15 and 20 respectively. The SD shows the volatility of returns. This is not possible as higher the volatility of returns higher should be the expected returns but here its opposite.
b) In this case the expected returns are proportionally in accordance with beta values. The higher the beta values the higher the systematic risk and to compensate the risk higher the expected returns. This is possible.
c) In this scenario higher the standard deviation higher volatility of returns higher the expected returns. The expected returns are higher for higher standard deviations. This is possible.
d) The higher the beta higher the systematic risk and the investor should be compensated for higher risk . In this case the higher beta has more expected return ans vice versa. This is not possible
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3. Assume we are in a CAPM world. Tell me if each of the following scenarios...
CAPM For a risky return r, CAPM equation is Er -r- B(E[rm] -r), where r is risk-free rate, Tm is ...
CAPM For a risky return r, CAPM equation is Er -r- B(E[rm] -r), where r is risk-free rate, Tm is market return, and is loading of risky return r on market return rm In what follows, X and Y denote arbitrary assets, B risk-free bond, M market portfolio. Determine which of the following scenarios are consistent or inconsistent with mean-variance efficiency (that is, CAPM). In your answer, write "Consistent" or "Inconsistent", and give brief explanation. 25% 12% 0.8 1.2 25...
CAPM Question Problem 1 (15pts). Given the following data: Security Beta Expected Return 1.3 20% 0.8...
CAPM Question
Problem 1 (15pts). Given the following data: Security Beta Expected Return 1.3 20% 0.8 14% 18% 1.2 (a) (10pts). Assume Securities 1 and 2 are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (b) (5pts). Would you recommend buying Security 3 according to CAPM? Why or why not?
In relation to the CAPM, indicate for each of the following statements whether it is true...
In relation to the CAPM, indicate for each of the following statements whether it is true or false and explain why. (a) Investors do not differ in their attitudes toward risk. (b) In equilibrium, all risky assets are priced such that their expected return lies on the security market line. (c) If a share's expected return is 4% and the expected return on the market portfolio is 15%, the share's beta must be negative. (d) Two securities with the same...
Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the...
Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that...
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and...
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and...
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?
Consider the following two scenarios for the economy and the expected returns in each scenario for...
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Scenario Market Aggressive Stock A Defensive Stock D Bust –6 % –12 % –4 % Boom 15 36 10 Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c....
Problem 1 Part B (Exercise n. 4, 8.a, and 8.b in the book) . What must be the beta of a portfolio...
Problem 1 Part B (Exercise n. 4, 8.a, and 8.b in the book) . What must be the beta of a portfolio with E(r)-20%, if r, 5% and E(%) = 15% ? Consider the following table, which gives a security analyst's expected return on two shares for two particular market returns (the two scenarios are equally likely) 5% 20% 2% 32% 25% 14% What are the betas of the two shares? What is the expected rate of return on each...
Consider the following two scenarios for the economy and the expected returns in each scenario for...
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Bust Boom Rate of Return Aggressive Defensive Market Stock A Stock D -12% -4% 15 -6% 36 10 Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill...
i dont understand how to compute the beta for question b Mr. Geller collected information regarding...
i dont understand how to compute the beta for question b
Mr. Geller collected information regarding the following stocks and portfolio: Portfolio P1 Security Security B E(T) 5 % 10% Standard Deviation Weight Security A 40% Weight Security B 40% Weight Security C 20% Security C 3% 0% 20% Mr. Geller also has information regarding the following variance covariance matrix: Variance - Covariance Security A Security B Market Portfolio Security A 0.0064 Security B -0.005 Market Portfolio 0.05 0.025 0.04...
CAPM For a risky return r, CAPM equation is Er -r- B(E[rm] -r), where r is risk-free rate, Tm is market return, and is loading of risky return r on market return rm In what follows, X and Y denote arbitrary assets, B risk-free bond, M market portfolio. Determine which of the following scenarios are consistent or inconsistent with mean-variance efficiency (that is, CAPM). In your answer, write "Consistent" or "Inconsistent", and give brief explanation. 25% 12% 0.8 1.2 25...
CAPM Question
Problem 1 (15pts). Given the following data: Security Beta Expected Return 1.3 20% 0.8 14% 18% 1.2 (a) (10pts). Assume Securities 1 and 2 are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (b) (5pts). Would you recommend buying Security 3 according to CAPM? Why or why not?
In relation to the CAPM, indicate for each of the following statements whether it is true or false and explain why. (a) Investors do not differ in their attitudes toward risk. (b) In equilibrium, all risky assets are priced such that their expected return lies on the security market line. (c) If a share's expected return is 4% and the expected return on the market portfolio is 15%, the share's beta must be negative. (d) Two securities with the same...
Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that...
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?
3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?
Problem 1 Part B (Exercise n. 4, 8.a, and 8.b in the book) . What must be the beta of a portfolio with E(r)-20%, if r, 5% and E(%) = 15% ? Consider the following table, which gives a security analyst's expected return on two shares for two particular market returns (the two scenarios are equally likely) 5% 20% 2% 32% 25% 14% What are the betas of the two shares? What is the expected rate of return on each...
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Bust Boom Rate of Return Aggressive Defensive Market Stock A Stock D -12% -4% 15 -6% 36 10 Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill...
i dont understand how to compute the beta for question b
Mr. Geller collected information regarding the following stocks and portfolio: Portfolio P1 Security Security B E(T) 5 % 10% Standard Deviation Weight Security A 40% Weight Security B 40% Weight Security C 20% Security C 3% 0% 20% Mr. Geller also has information regarding the following variance covariance matrix: Variance - Covariance Security A Security B Market Portfolio Security A 0.0064 Security B -0.005 Market Portfolio 0.05 0.025 0.04...
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