With the assistance of an annotated graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model., when the calculated expected rate of return of a security is 12.2% and the actual expected rate of return on a security is 10%

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 premium

Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. . Determine how the appropriate yield to be offered on a security is affected by a higher default risk premium. Explain the logic of this relationship.

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? 1. I. Asset's standard deviation 2. II. Asset's beta 3. III. Risk-free rate of return 4. IV. Market risk premium I, III, and IV only I, II, III, and IV I and III only II and IV only III and IV only ооо O

The possible returns of a security I and research returns under three possible states are as follows. Probability % market % security 0.2 15 10 0.5 13 16 0.3 25 30 The risk free rate is 9%, determine the required rate of return of security I and sate whether it is correctly valued. 12-marks] 20 Ri= E(R) XW

In the context of the Pastor-Stambaugh multifactor model (PSM), the relevant risk factors are the same as those in the Fama-French multifactor model plus an additional factor that represents __________.   seasonality in security returns   industrial production   a liquidity premium   expected inflation

Which asset below is generally the most suitable benchmark measure of the risk-free return? Treasury bills Small stocks Long-term government bonds Non-investment grade bonds Common stocks

Provide some idea of the effect of the sensitivity of security prices to changes in market interest rates?

According to the capital asset pricing model, assets with Lower; lower; unsystematic Higher; higher, unsystematic Lower; higher; unsystematic Higher; higher; systematic Higher; lower; systematic betas have expected returns because betas quantify the degree of risk. Please fill in the blank.

What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed