Question

Suppose you observe the following situation: Security Pete Beta 1.25 Expected Return .1323 Corp. Repete Co. .87 .0967 a. Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the risk-free rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return on market using Pete Corp. Expected return on market using Repete Co. Risk-free rate b.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Page Layout File Home Insert Formulas Data Review View Add-Ins Z AutoSum Cut Wrap Text Calibri 11 General ECopy Fill Merge & Center Insert Delete Format Paste в IU* Conditional Format Cell Sort & Find & Filter Select % KH- Format Painter Clear Formatting as Table Styles Clipboard Number Font Alignment Styles Cells Editing fox JX19 KЕ КН JW JX JY JZ КА КВ КС KD KF KG KI КJ КK KL 2 AS SECURITIES ARE CORRECTLY PRICED REWARD TO RISK RATIOS SHOULD ALSO BE EQUAL FOR BOTH STOCKS 4 |(Rp-Rf)/beta REWARD TO RISK RATIO = 5 6 PETE CORP 7 REPETE CORP (0.1323-Rf)/1.25 (0.0967-Rf)/0.87 8 1.25* (0.0967-Rf) 0.12088-1.25(Rf) 0.87*(0.1323-Rf) 9 0.1151-0.87(Rf) 10 0.38 (Rf) 0.00578 11 Rf 0.01521 12 Rf 13 RISK FREE RATE = 1.5211% 1.52% 14 15 EXPECTED RETURN ON MARKET = Rm USING PETE CORP RETURN = Rf beta(Rm -Rf) 16 0.1323 0.01521+1.25*(Rm-0.01521) 0.11709 1.25*(Rm-0.0152 1) 17 18 0.09367 (Rm-0.01521) 19 10.89% 20 Rm = DIR right RESI e DGM beta LEASING КЕ САРМ PV, FV, ANNUITY UTILITY, SHARPE, beta port future INDEX clean YIELD bond portfolio cONvexity INTL CAP BUD cap stru WACC L 130 % erences WA 02:44 TENG 21-11-2019

ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut A A Wrap Text Calibri 11 General Copy Fill Merge & Center $ % Insert Delete Format Paste В IU- +.0 .00 Conditional Format Cell Sort & Find & Filter Select .00 0 Format Painter Clear Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fox КАЗЗ KЕ КН JW JX JY JZ КА КВ КС KD KF KG KI КJ КK KL 21 USING REPETE CORP : RETURN = Rf+beta(Rm -Rf) 22 0.0967 0.01521 +0.87*(Rm-0.01521) 23 0.08149 = 0.87*(Rm-0.0152 1) 24 0.09367 = (Rm-0.01521) 25 26 Rm = 10.89% 27 ANSWERS 28 29 10.89% a 10.89% 30 b 31 1.52% 32 33 34 35 36 37 38 39 RESI e UTILITY, SHARPE, beta YIELD bond portfolio LEASING PV, FV, ANNUITY clean КE САРМ CONvexity DGM port future INDEX beta DIR right INTL CAP BUD cap stru WACC Rea erences 130% WA X 02:45 TENG 21-11-2019