investment is considered with a commensurate risk premium of 5.6%. The current market growth rate is 2%. Knowing that the risk free rate in such market is 1.3%, what is the A cap rate? O a. 5.6% O b. 4.9% O . Impossible to calculate O d. 3.3%

investment is considered with a commensurate risk premium of 5.6%. The current market growth rate is 2%. Knowing that the risk free rate in such market is 1.3%, what is the A cap rate? O a. 5.6% O b. 4.9% O . Impossible to calculate O d. 3.3%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: Suppose you have $2,000 to invest. The market portfolio has an expected return of 10.5 percent and a…

A: Let the weight in Risk free Asset be A Therefore, weight in market portfolio be 1-A

Q: Your estimate of the market risk premium is 5%. The risk-free rate of return is 4%, and JB Hi Fi has…

A: Market Risk Premium = 5% Risk Free Rate = 4% Beta = 1.5

Q: c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is…

A: We’ll answer the first question since the exact one wasn’t specified. Please submit a new question…

Q: You estimate of the market risk premium is 7%. The risk-free rate of return is 3.1 % and General…

A: In the given question we are require to calculate the expected return of General Motors from the…

Q: Suppose that the spot exchange rate is $1.5/£, that the beta on the £ forward market return (i.e.,…

A: The capital asset pricing model is used extensively for the valuation of stock and calculating the…

Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…

A: Hello. Since your question has multiple sub-parts, we will solve first three sub-parts for you. If…

Q: Monroe Mclntyre has estimated the expected return for Bruehl Industries to be 9.45%. He notes the…

A: The Capital Asset Pricing Model (CAPM) refers to the model which tells us how the financial markets…

Q: The risk-free rate is 4%, and the expected rate of return on the market portfolio is 9%. Calculate…

A: In the given problem we require to calculate the required rate of return on a security from the…

Q: Asset W has an expected return of 21.3 percent and a beta of 2.05. If the risk-free rate is 3.5…

A: Following details are given to us in the question regarding Asset W : Expected Return (ER) = 21.3…

Q: The current risk-free rate of return is 4.6%. The market risk premium is 6.6%. D'Amico Co. has a…

A: As per CAPM Cost of equity = Risk free rate + beta * Market risk premium

Q: Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a…

A: Risk-free rate = 3% Future Inflation rate = 4% Maturity risk premium = 0.10%

Q: Far Horizon Journeys has an expected return of 9.90%, the risk-free rate is 2.20%, and the market…

A: Expected Return = 9.90% Risk Free Rate = 2.20% Market Risk Premium = 6.85% Beta = ?

Q: uppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a…

A: Here, Details of Ques-A: Real Risk Free Interest Rate is 3% Inflation Rate is 6.60% Maturity Risk…

Q: Kaiser Aluminum has a beta of 0.70. If the risk-free rate (RRF) is 5.0%, and the market risk premium…

A: Following details are given : Beta = 0.70 Risk free rate (RRF) = 5.0% Market risk premium (RPM) =…

Q: Company XYZ has a CAPM beta of 1.5. The expected return on the market is 20% and the risk-free rate…

A: Expected return can be calculated by using CAPM equation given below Expected return =Risk free…

Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…

A: Hai there! Thanks for the question. Question has multiple sub parts. As per company guidelines…

Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…

A: 4. SML equation : expected return =rf+beta×rm-rfwhere,rf= risk free raterm= market return

Q: The Treasury bill rate is 3.1%, and the expected return on the market portfolio is 10.2%. Use the…

A: According to CAPM model: rate of return =risk free rate+beta ×market return - risk free rate

Q: Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a…

A: Required Rate of Return: It is the rate which should be the minimum earning on an investment to keep…

Q: Kaiser Aluminum has a beta of 0.70. If the risk-free rate (Rer) is 5.0%, and the market risk premium…

A: A model that represents the relationship of the required return and beta of a particular asset is…

Q: The current risk-free rate of return (rRf) is 4.67% while the market risk premium is 5.75%. The…

A: According to the CAPM model the cost of equity is the sum of the risk free rate plus the product of…

Q: Based on the pure expectations theory, is the following statement true or false? A certificate of…

A: Since more than three sub-parts are posted at a time. The answer for first three sub-parts is only…

Q: Determine the weights of a portfolio with a standard deviation of 7% created by combining T-Bill and…

A: Expected Return on Portfolio: It is estimated by adding the individual security returns that are…

Q: Equity has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns…

A: Beta = 1.35 Expected Return = 16% Return Risk-free asset = 4.8% Part a: Weight of asset = 50%…

Q: interest is 6 percent and the expected retun on the market is 11 percent. What is the market risk…

A: Market risk premium is the difference between expected return from market and risk free rate. Market…

Q: The rate of return on T-bills is 3.25% and the expected return on the market is 9.50%. J&X, Inc. had…

A: The risk-free rate of return is the ideal rate of return on a risk-free investment. In principle,…

Q: The return on the market is 10.5% and the risk-free rate is 2.90%. The investor is conservative and…

A: CAPM refers to capital asset pricing model. This model shows the relationship between systematic…

Q: The current risk-free rate of return is 4.67%, while the market risk premium is 6.63%. The D'Amico…

A: In the given question we need to compute the D'Amico's cost of equity using Capital asset pricing…

Q: The Treasury bill rate is 3%, and the expected return on the market portfolio is 14%. According to…

A: Part (a): Calculation of risk premium on the market: Answer: Risk premium is 11%

Q: A researcher has determined that a two-factor model is appropriate to determine the return on a…

A: Risk free rate (Rf) = 11% GNP market return (R1) = 13.5% GNP beta (B1) = 1.2 Interest rate return…

Q: Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns…

A: If a stock is traded at its intrinsic value, it is valued fairly but if it trades at different…

Q: A treasury bill pays a 6% rate of return. The market portfolio pays 15% with a probability of 20% or…

A: A treasury bill is issued by the government as short-term security. They have a maturity of less…

Q: The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%. According che…

A: Given information : Treasury bill rate = 6% Expected return on market portfolio = 12% And, CAPM…

Q: Suppose that you know that the following well-diversified portfolios are fairly priced in a…

A: Investment in the security market contains a high degree of risk. The investor is attached to the…

Q: the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at…

A: The below answer is given by two methods , but the appropriate is fist method which is simple rate…

Q: What is the real risk-free rate of return, r*? The

A: Information Provided: 1-year T-bills yield = 7.00% Future inflation rate = 2.00%

Q: Required Return If the risk-free rate is 11.8 percent and the market risk premium is 7.6 percent,…

A: Formula: Required rate of return = Risk free rate + [Beta X Risk Premium] Note: Beta for Market is…

Q: What is the return of the portfolio will be?

A: Note: Since you have asked multiple questions, we will solve the first question for you. If you want…

Q: Consider the two risky investments below: Scenario Asset 1 Asset 2 Probability Returns 0.1…

A: Part 2 of the questio is : What is the difference between systematic and non-systematic risk. There…

Q: Suppose that the relevant equilibrium model is the CAPM with unlimited borrowing and lending at the…

A: Market risk premium is the difference in the market return µm and the risk free rate rf. This can be…

Q: The risk-free rate is 7% and the expected rate of return on the market portfolio is 12%. a.…

A: Possible return from the investment and risk involved in it, both are related to each. There are…

Q: Kaiser Aluminum has a beta of 0.70. If the risk-free rate (Res) is 5.0%, and the market risk premium…

A: Capital Asset Pricing Model(CAPM) is the model which shows the relationship between the systematic…

Q: Assume that the CAPM is true, Rf = 5%, Rm= 15% σm = 0.1. An investor with $10,000 to invest builds…

Q: The estimated beta for Caterpillar Inc. is 135. The risk free rate of return is 3 percent and the…

A: Financial statements are statements which states the business activities performed by the company .…

Q: Kollo Enterprises has a beta of 0.70, the real risk-free rate is 2.00%, investors expect a 3.00%…

A: Given, Beta = 0.7 Risk-free rate = 2% Future inflation rate = 3% Market risk premium (Rm) = 4.7%…

Q: Within the context of the capital asset pricing model (CAPM), assume:∙ Expected return on the market…

A: Capital asset pricing model (CAPM) represents the relationship between the risk and return of an…

Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…

A: Security market line (SML) is a graphical representation of how the approach of the capital asset…

Q: onsidered with a commensurate risk premium of 5.6%. The current market growth rate is 2%. Knowing…

A: Capital Asset Pricing Model (CAPM): A Capital Asset Pricing Model is the technique of determining…

Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

investment is considered with a commensurate risk premium of 5.6%. The current
market growth rate is 2%. Knowing that the risk free rate in such market is 1.3%, what is the
cap rate?
O a. 5.6%
O b. 4.9%
O. Impossible to calculate
O d. 3.3%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Details

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Compute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) = 14%; βi = 1.0.b. Recalculate the required rate of return assuming βi is 1.8.25. a. Compute the expected rate of return on investment i given the followinginformation: the market risk premium is 5%; Rf = 6%; βi = 1.2.b. Compute E(RM)
If the risk-free rate is 10.2% and the market risk premium is 4.4%, what is the required return for the market? a. 5.8% b. 4.4% C. 14.6% d. 10.2%
8. Given the following information what must be the risk-free rate of interest (assume the asset is properly priced)? The expected return of the market is 14.25%, the stock's B is.82 and the expected return of the asset is 12.89%. A.5.91% B. 6.69% C. 7.41% D. 8.93%
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Col 1.39 0.153 What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places) Risk-free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. Repete Co.%
The expected market return is 5%. The risk-free rate is 3%. According to the CAPM equation, what is the expected return on an asset which has alpha=1.5%, and beta=1.9 ? O a. 11.0% O b. 5.3% O c. 5% O d. 6.8% O e. 8.3%
Suppose the Capital Asset Pricing Model (CAPM) is valid in a market. Use CAPM to ex- plain and answer following questions. Note: There is no relationship between each situation. (a) Can security A exist in the market? (Hint: Security market line) If yes, compute risk premium on security A. If not, is this security underpriced or overpriced? Expected return 5% Asset Beta Risk-free Market 12% 1 A 15% 1.3 (b) Can security B exist in the market? (Hint: Security market line) If yes, compute risk premium on security B. If not, is this security underpriced or overpriced? Expected return 6% Asset Beta Risk-free Market 13% 16.5% 1 1.5 Suppose the expected cash flow can be collected from investment in security B is $1000 at time 1. And an investor thinks the beta of security B is 1.8. But the actual beta is given in the above table. Then how much more/less (you also need to select "more" or "less") will he offer for the firm than it is truly worth at time 0? Hint: the present value of the cash…
The market risk premium (E[Rm]-Rf) is 6%. The risk-free rate (Rf ) is 2%. Asset X has beta equal to 0.8 and expected return equal to 7%. Asset Y has beta equal to 1 and expected return equal to 7.5%. What level of abnormal return can be expected from a 1:1 long-short portfolio of X and Y? a. 0.7% b. 0.6% c. 0.5% d. 0.4% e. None of the above
4. Given a real rate of interest of 3.2%, an expected inflation premium of 5.1%, and risk premiums for investments A and B of 7.4% and 8.9% respectively, find the following: a. The risk-free rate of return, r; b. The required returns for investments A and B Review Only Click the icon to see the Worked Solution. a. The risk-free rate of return is %. (Round to one decimal place.) b. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.)
Dhofar Energy Services has a Beta = 1.68 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.1410 b. 1.0970 c. All the given choices are not correct d. 0.1654 e. 0.2369
For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by due to risks that it has in common with the market. ..... А. 1% В. beta C. alpha D. 0%
QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…
1. Given the following summary statistics, Mean S.D. 1.235 0.997 Asset A 0.52 Asset B. 0.44 (a) If the correlation between the two financial series is 0.25. What are the optimal portfolio weights to minimize risk? (b) What are the expected return and standard deviation of the optimal port- folio? (c) Compute the 1% Value-at-Risk for the next 5 days (d) Compute the expected shortfall

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS