Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas
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. E(RI) = .15(.11) + .55(.18) + .30(.08)
Using CAPM to determine the expected rate of
Stock Beta
WND 0.80
STA 1.35
CTE 1.15
DUY 1.20
EVN -0.20
Stock WND the economy’s RFR to be 6 percent (0.06) and the expected return on the market portfolio (E(RM)) to be 8 percent (0.08)
Stock STA, the economy’s RFR to be 5percent (0.05) and the expected return on the market portfolio (E(RM)) to be 7 percent(0.07)
Assume that all the other stocks is as follows since we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09),
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- Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.Using the following information determine the expected rate of return for a risky asset using CAPM, consider the following example stocks assuming that you have already computed their betas Stocks Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Also assume that you expect the economy RFR to be 6% (0.06) and the expected return on the market portfolio (E(Rm)) to be 8% (0.08) which implies a market risk premium of (0.04). What would be the SML required rate of return for the following stocks: A, B, C, D and E.Using the following information determine the expected rate of return for a risky asset using CAPM, consider the following example stocks assuming that you have already computed their betas Stocks Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that you expect the economy RFR to be 6% (0.06) The expected return on the market portfolio (E(Rm)) to be 8% (0.08) A market risk premium of (0.04). Question: What would be the SML required rate of return for the following stocks. A, B,C,D and E
- The following expected return and the standard deviation of current returns are known: Security (i) Expected Return Standard Deviation βi A 0.20 0.12 1.1 B 0.12 0.10 0.8 T-Bills 0.05 0 0 Market Portfolio 0.20 0.15 1 Required: How will you invest $1000 in riskless T-bills and the risky assets in the Market Portfolio to maintain a standard deviation of 10%.Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. (a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .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 that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?…Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?Given a Risk Free Rate (RFR) of 15%, draw the Security Market Line (SML) clearly plotting the two stocks and Compute the Covariance (?????) and Correlation Co-efficient of the above two stocks and interpret your computation. States of the Economy Probability Asset A (RA) Asset B (RB) Recession 60 20 35 Normal 20 17 27 Boom 20 14 40
- . Suppose your expectations regarding the stock price are as follows: Selling price = 100 T-bills = 6% dividend = 10 per 100 value State of market Probability Ending price Вoom 0.3 140 Normal growth 0.4 110 Recession 80 0.3 Calculate the HPR for each scenario, the expected rate of return, and the risk premium on your investment, and standard deviation of excess return.Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM )is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%,and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%,and -10%, respectively. Compute the beta and expected return of portfolio 2.Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) +6.9 Change in energy prices 0.4 Change in long-term interest rates +2.6 Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.8%. A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.) A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.) A pure-play energy stock with high exposure to the energy factor (b = 1.9) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.) An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.9 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices…