portfolio.. - Word****ReferencesMailingsReviewView HelpRCMAcrobatFoxit Reader PDFFoxit PDF5. The risk-free rate and the expected market rate of return are 0.04 and 0.14,respectively. According to the capital asset pricing model (CAPM), the expectedrate of return on security X with a beta of 1.25 is equal to:a. 0.004b. 0.165C. 0.121d. 0.132

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and…

Answered: rate of return on security X with a…

Business

Finance

rate of return on security X with a beta of 1.25 is equal to:

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: Assume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei…

A: Variance: It indicates the spread of any data set. Variance is calculated by squaring the standard…

Q: 1. A security has an expected rate of return of 0.11 and has a beta (B) of 1.5. The risk-free rate…

A: 1) Expected return = 11% Beta = 1.5 Risk free rate (Rf) = 5% Market return (Rm) = 9%

Q: Complete the table below using CAPM model…

A: Given: Risk free rate = 10% Market rate = 18% Beta = 0.8

Q: What is kd of investment whose Beta is 1.4 and market premium is 8% while risk free rate is 5%?

A: Here kd of investment means cost of investment, therefore we need to calculate cost of investment…

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

A: Given that;Return on market portfolio is denoted by RM.Required return on stock A is RA and the…

Q: Based on the following probability distribution, what is the security’s expected return? State…

A: Calculate the expected return as follows: Expected return = Sum of product of (Probability *…

Q: Based on the following table, compute the reward-to-risk ratio for security Pearl if the risk-free…

A: Security Beta Expected return Pearl 0.9 17% Emerald 1.2 17%

Q: the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of…

A: The question is based on the concept of capital asset pricing model (CAPM) ,security market line and…

Q: The expected return on Kiwi computer is 16.6%. if the risk free is 4% and the expected return on…

A: Given: Expected return = 16.6% Risk free rate = 4% Expected return on market =10%

Q: What is the Variance of returns for Security XYZ? (no rounding off until the final answer, final…

A: Information OUTCOME PROBABILITY EXPECTED RETURN A 20% 20% B 80% 25%

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

A: Solution: As per the security market line following is the Rate of return for stock A and stock B…

Q: The betas are identical when the projected rate of return of a security and the market are both…

A: Beta is sensitivity of stock return with overall market rate of return.

Q: The risk-free security has a beta equal to ________ , while the market portfolio's beta is equal to…

A: Beta is a measure for analyzing the volatility of a portfolio in relation to overall market.

Q: Based on the following probability distribution, what is the security's expected return? State…

A: Formula: Expected return = Specific probability * Specific return or pay off

Q: The beta of the risk free security is: a) 0 b) > 0 but < 1 c) 1 d) > 1

A: It is used in CAPM to measure the systematic risk or volatility of a security or a portfolio, in…

Q: Given the following probability distributions, what are the expected returns for the Market and for…

A: State Pr i rM rJ 1 0.3 −10% 40% 2 0.4 10 −20 3 0.3 30 30

Q: Compute the (a) expected return, (b) standard deviation, and (c) coefficient of variation for…

A: probability A return (return-expected return) (return-expected return)2 (return-expected return)2 x…

Q: Security A has the following probability distribution of returns: Scenario Probability Return 1…

A: Expected return =0.1 x 15+0.8×25+0.1×35 Expected return =1.5+20+3.5=25% Mean return =25%

Q: If standard deviation of security A is 27% and security B is 18%, the correlation coefficient…

A: Standard deviation of security A (sdA) = 27% Standard deviation of security B (sdB) = 18%…

Q: Security A has the following probability distribution of returns: Scenario Probability Return 1]…

A: The variance of security is a measurement of the dispersion of returns from the average return of…

Q: The beta of a risk-free security is _____ and the beta of the overall market is _____: a. 0; 1.…

A: Beta of risk free security Since does not fluctuate with or against the market, hence beta of risk…

Q: Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3,…

A: Honor code: Since you have posted a question with multiple sub-parts, we will solve the first three…

Q: Consider the following information (Assume that Security M and Security N are in the same financial…

A: Systematic risk is also known as non-diversifiable risk, and it exist for entire market. It arises…

Q: Based on the following probability distribution, what is the security's expected Expected Return…

A: Expected return of the security is calculated as the sum of the product of probability and…

Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation…

A: To know the riskiness between the two projects, Coefficient of variation gives good results. Higher…

Q: The beta of the risk-free asset is: 0.5 0.5 1.0 -1.0 2.0

A: In this question we need to tell the value of beta of risk free asset.

Q: Security A has an expected rate of return of 6%, a standard deviation ofreturns of 30%, a…

A: Beta coefficient: Beta coefficient measures the propensity of an assumed security’s anticipated…

Q: I asked this question (provided below) and was able to follow the response. I also got the same…

A: Thanks a lot for appreciating the earlier solution. I also appreciate your question. Let me help you…

Q: Calculate the (a) expected return, (b) standard deviation, and (c) coefficient of variation for an…

A: Expected return: It can be computed by taking the product of the probability of a specific payoff…

Q: Security A has an expected return of 7%, a standard deviation of returns of35%, a correlation…

A: Given data; 1) stock A expected return = 7% standard deviation = 35% correlation coefficient with…

Q: What is the expected return on asset A if it has a beta of 0.5, the expected market return is 13%,…

A: The expected return on the asset can be calculated as per capital asset pricing model.

Q: Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and…

A: In the given we need to analyze whether the security X is Under-valued or over-valued. For this we…

Q: MULTIPLE] Consider a single-factor model -conomy. Portfolio M has a beta of 1.0 on the actor and…

A: The arbitrage pricing hypothesis (APT) is a multifaceted resource evaluating model dependent on the…

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

A: Calculation of ratio of beta of A to beta of B: Answer: The ratio of beta A to beta B is 0.4286

Q: and the market risk premium (kM - KRF) is 2%. OShow your solutions and explain your answe Expected…

A: In this we need to calculate the required rate of return and compare with expected return on stock.

Q: The security market line has a slope equal to the a) Risk-free rate b) Market risk premium c)…

A: Security market line is the line shown on a graph that represents the relationship between the…

Q: If the dispersion around a security's return is larger * the standard deviation is smaller the…

A: Risk refers to probability of losses related to investment. In finance, Standard Deviation is used…

Q: What is the expected rate of return on a security with beta = 0? 2.

A: In the given question we need to answer what will be the expected rate of return on a security if…

Q: Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei…

A: Given:

Q: Suppose the market premium is 12%, market volatility is 20% and the risk-free rate is 6%. Suppose a…

A: Market risk premium (Mp) = 0.12 or 12% Risk free rate (Rf) = 0.06 or 6% Beta (b) = 0.8 Expected…

Q: Expected return of the X security is 12% and its standard deviation is 20%. Expected return of the Y…

A: Given information : Return X security 12% Return Y security 15% Standard deviation X security…

Q: The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According…

A: We need to compute the expected rate of return on security X according to Capital Asset pricing…

Q: What is the required return on an investment with a beta of 1.3 if the riskfree rate is 2.0 percent…

A: CAPM evolved as a way to measure this systematic risk. Sharpe found that the return on an individual…

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

100%

portfolio.. - Word
****
References
Mailings
Review
View Help
RCM
Acrobat
Foxit Reader PDF
Foxit PDF
5. The risk-free rate and the expected market rate of return are 0.04 and 0.14,
respectively. According to the capital asset pricing model (CAPM), the expected
rate of return on security X with a beta of 1.25 is equal to:
a. 0.004
b. 0.165
C. 0.121
d. 0.132

Expert Solution

This question has been solved!

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

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

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

Suppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.
The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model, the expected rate of return of a security, that you are interested in, has a beta of 1.25 would be equal to Calculate the expected rate of return
a) Suppose the risk-free rate is `X'% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results. b) Using a graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model. Plot your answer from (a) onto this graph.
Consider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
The risk-free rate and the expected market return are 5% and 12%, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 2 is equal to: a 19% b 29% c 12% d 10% e 15%
4. Suppose that there are 2 assets with ri 012 = 0.005. = 0.20, 01 = = 0.40, 2 = 0.10, 02 = 0.25 and (a) If ro = 0.02, what are the market portfolio return and variance? What are the corre- sponding weights (i.e. how much to invest in asset 1, asset 2, and the risk-free asset to get the market portfolio)? Answer. (b) If ro 0.05, what are the market portfolio return and variance? What are the corre- sponding weights? Answer.
The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?
a) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results
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
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Calculate the expected return from the following security using the CAPM Capital Asset Pricing Model: Standard Deviation of Security = 0.18 Standard Deviation of Market Portfolio = 0.10 Expected Return on Market Portfolio = 0.09 Correlation between possible Returns for the Security and the Market Portfolio = 0.70. Expected Risk Free Rate = 0.03

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