Bodie‚ Kane‚ Marcus‚ Perrakis and Ryan‚ Chapter 7 Answers to Selected Problems 1. What is the beta of a portfolio with E[rp ] = 18 percent‚ if rf = 6 percent and E[rM ] = 14 percent? Answer: Using the CAPM equilibrium condition‚ E[rp ] = rf + βp E[rM ] − rf ⇒ βp = E[rp ] − rf .18 − .06 = 1.5 . = E[rM ] − rf .14 − .06 2. The market price of a security is $50. Its expected return is 14 percent. The risk-free rate is 6 percent and the market risk premium is 8.5 percent. What will be the market
Free Financial markets
Corporate finance P. Frantz‚ R. Payne‚ J. Favilukis FN3092‚ 2790092 2011 Undergraduate study in Economics‚ Management‚ Finance and the Social Sciences This subject guide is for a Level 3 course (also known as a ‘300 course’) offered as part of the University of London International Programmes in Economics‚ Management‚ Finance and the Social Sciences. This is equivalent to Level 6 within the Framework for Higher Education Qualifications in England‚ Wales and Northern Ireland (FHEQ). For more
Premium Corporate finance Capital structure Finance
r is constant‚ the price of the asset is given by the present value formula Pt = E (Ct+1 ) E (Ct+2 ) E (Ct+3 ) + + + ... 2 1+r (1 + r) (1 + r)3 The discount rate r is the same as the expected return of the asset‚ and is given by a model such as CAPM or APT (b) Similarly‚ consider a project involving a series of (net) cash flows
Premium Bond Option
Author(s) of paper: Helene Sierant & Thomas Sierant CPR no.: 010789 – 2338 & 121187- 2515 Date of Submission: December 5‚ 2012 | | Abstract Taking a shareholder perspective‚ the paper focuses on CSR as a method to reduce idiosyncratic risk. In analyzing this subject‚ the goal is to complement existing literature on CSR and CFP with the integrative use of risk management and real option theory. Whereas previous research have been ex-posed based and solely consider the reduced
Premium Corporate social responsibility Corporate finance Social responsibility
return and risk. A. APT stipulates B. CAPM stipulates C. Both CAPM and APT stipulate D. Neither CAPM nor APT stipulate E. No pricing model has found Both models attempt to explain asset pricing based on risk/return relationships. Difficulty: Easy 2. ___________ a relationship between expected return and risk. A. APT stipulates B. CAPM stipulates C. CCAPM stipulates D. APT‚ CAPM‚ and CCAPM stipulate E. No pricing model has found APT‚ CAPM‚ and CCAPM models attempt to explain asset
Premium Financial markets
Marked Problem Set 2 Dagoberto Gonzalez Paez Student ID --65824138 November 28‚ 2013 1. Suppose that you can trade a riskless asset that yields 5% and two risky assets A and B. The expected return of asset A is 8% and that of asset B is 11%‚ while the standard deviation of asset A is 14% and that of asset B is 23%. The covariance between assets A and B is ?0:0322. Solution . rA‚B= CovAR(A‚B) / [(σA)(σB)] = -0.0322 / (14%)(23%) rA‚B = -1 But when rA‚B = -1
Premium Standard deviation Variance Investment
Tax / Total Assets 10 5.1.6 Total Assets / Common Equity 10 5.1.7 Net Before Tax / Common Equity 10 5.1.8 Tax Retention on Ratio 10 5.1.9 Return on Equity 10 6 Valuation Assumptions 11 6.1 Required Rate of Return (CAPM) 11
Premium Time value of money Asset Financial ratio
iExaminers’ commentaries 2011 Examiners’ commentaries 2011 23 Investment management Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2010–11. The format and structure of the examination may change in future years‚ and any such changes will be publicised on the virtual learning environment (VLE). Specific comments on questions – Zone A Candidates should answer FOUR of the following EIGHT questions. All questions carry equal
Premium Bond Risk Financial markets
investors demand on Flamingo shares? Select one: a. 4.9% b. 11.5% c. 13.53% d. 16.53% Aunty Vera has given us $500‚000 to invest. We have found a stock we want to research “Sensational Weights and Measures”. Using our new knowledge we use CAPM to calculate that the expected return is 29%. We find that its Beta is 1.6. The Risk Free Rate is 4.5%. With our $500‚000 we decide to invest 80% into the risk free investment and 20% into “Sensational Weights and Measures” stock. What is the expected
Premium Bond Investment
Mean-Variance Analysis Mean-variance portfolio theory is based on the idea that the value of investment opportunities can be meaningfully measured in terms of mean return and variance of return. Markowitz called this approach to portfolio formation mean-variance analysis. Mean-variance analysis is based on the following assumptions: 1. All investors are risk averse; they prefer less risk to more for the same level of expected return. 2. Expected returns for all assets are known. 3. The
Premium