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
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- 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?…Supposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?Assuming two risk-free rates for lending and borrowing in the market: r(f) and r(b). Suppose your utility function is described by U = E(r) - 0.5A xo² with A> 0, and you are combining the risk-free asset with the optimal risky asset to maximize the utility. Consider the following two situations: 1. Suppose r(b) = r(f): you form the optimal complete portfolio C1 by borrowing money at r(f) and invest y1 (i.e., y1 represents portfolio weight) in the optimal risky portfolio (P1). Your utility score under this situation is denoted as U1; II. Suppose r(b) >r(f): you form another optimal complete portfolio C2 by borrowing money at r(b) and invest y2 (1.e., y2 represents portfolio weight) in the optimal risky portfolio (P2). Your utility score under this situation is denoted as U2. For simplicity, let's assume the optimal risky portfolios under these two situations are the same (i.e., E(P1)=E(P2) and o(P1) = o(P2)). What are the relationship between y1 and y2, U1 and U2: O a. y1=y2 and U1=U2 O…
- Given the current risk-free rate is 9% and the market return is 12%. TI Investment Beta A 0.65 1.12 C 0.87 1.19 E 0.56 Calculate the required rate of return for each of the investments by using the Capital Asset Pricing Model (CAPM). ii. i. If you invest an equal amount in each investment, what is the portfolio beta?4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate and explain the result of the CAPM based on the following data. a. Expected Return: 8% b. Risk-free rate: 4% c. Beta of the investment: 1.2 ER=Rf+B(ERm - Rf) where: ER = expected return of investment Rf risk-free rate B;= beta of the investment - (ERm - Rf) = market risk premiumFor each of the cases shown in the following table, use the capital asset pricing model (CAPM) to find the required return and explain your answer. Case Risk-free rate Market return Beta (%) (%) 8 A 5 1.3 В 8. 13 0.9 C 9 12 -0.2 D 10 15 1.0 E 10 0.6
- Use the basic equation for the capital asset pricing model (CAPM) to find therequired return for an asset with a beta of 2.20 when the risk-free rate and market return are 8% and12%, respectively.Consider the following information: The possible rate of return for a portfolio for an investment is shown below.Probability Possible rate of return 0.25 0.09 0.25 0.11 0.25 0.13 0.25 0.16What is the expected rate of return for the investment?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.
- 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.1. calculate the beta of the portfolio below consisting of assets x, y and z. discuss the meaning of the number calculated and include in your answer what type of investor is likely to invest in this portfolio. Asset Weight (Wi) Beta (βi) X 0.30 0.09 Y 0.50 0.90 Z 0.20 0.16a) 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
