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 riskpremium on security A. If not, is this security underpriced or overpriced?Expected return5%AssetBetaRisk-freeMarket12%1A15%1.3(b) Can security B exist in the market? (Hint: Security market line) If yes, compute riskpremium on security B. If not, is this security underpriced or overpriced?Expected return6%AssetBetaRisk-freeMarket13%16.5%11.5Suppose the expected cash flow can be collected from investment in security B is $1000at time 1. And an investor thinks the beta of security B is 1.8. But the actual beta is givenin the above table. Then how much more/less (you also need to select "more" or "less") willhe offer for the firm than it is truly worth at time 0? Hint: the present value of the cashflow =cash flowErB under certain beta"(c) Can security C exist in the market? (Hint: Capital market line) If yes, compute riskpremium on security C.AssetRisk-freeMarketExpected return7%Standard deviation15%10%12%18%

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Suppose the Capital Asset Pricing Model (CAPM) is valid in a market. PM 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? Asset Risk-free Market Beta Expected return 5% 12% 15% 1. 1.3

Suppose the Capital Asset Pricing Model (CAPM) is valid in a market. PM 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? Asset Risk-free Market Beta Expected return 5% 12% 15% 1. 1.3

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 4P

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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.
Consider a two-factor Arbitrage Pricing Theory (APT) model, T; = a; + b1,ifı + b2.i f2 + €i, with the following information Asset i Asset 1 0.07 0.50 0.25 Asset 2 0.15 1.10 0.75 Asset 3 0.20 b1,3 Hi b1i b2i 1.0 and the risk-free rate rp is 0.025. (a) Find the value of b13 to preclude arbitrage opportunity. (b) is an Asset 4 with 4 = 0.13, b14 = 0.8, and b2.4 = 0.4. Explain how you would exploit an arbitrage opportunity if there
Question 2 a) Plot the Security Market Line (SML).b) Superimpose the CAPM’s required return on the SML.c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph
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SITIcation. 24. In the capital asset pricing model, the beta coefficient is a measure of index of the degree of movement of an asset's return in response to a change in risk and an A) diversifiable; the prime rate B) nondiversifiable; the Treasury bill rate C) diversifiable; the bond index rate D) nondiversifiable; the market return 5. Loading document MacBook Air DII DD 80 F7 F8 F9 F2 F3 F4 F5 F6 呂
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Exploring Finance: Security Market Line. Security Market Line Conceptual Overview: Explore the determinants of the security market line. The Security Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk-free return (rf in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the rf slider below the graph to change the amount of the risk-free return. These changes reflect changes in inflation. Drag the RPM slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor line to evaluate securities with different beta coefficients. r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00% 1. For a risk-free return rate of 5%, a…