Write the equation of the Security Market Line (SML). Compute and draw the SML when the expected return of the NASDAQ index (market portfolio) is 17% and the return to the risk-free asset is 7%.
Q: Theodore makes beginning of year deposits of 3000 for 10 years into a fund earning interest at an…
A: This pertains to the concept of time value of money. Beginning of the year deposits of 3000 is…
Q: Cusic Music Company is considering the sale of a new sound board used in recording studios. The new…
A: Operating cash flow is helpful in measuring the amount of cash generated from the business…
Q: (a) the expected returns of the stocks A and B;
A: Portfolio is the combination of securities and stock being held by the business. Expected return of…
Q: Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds.…
A: Formula used: Nominal interest rate=Real interest rate +Inflation rate Real interest rate =Nominal…
Q: View History Bookmarks Window > O mortized Loans - 21516 MAT142 Topics In College Math DERIVITA…
A: Present value is the estimation of the current value of future cash value which is likely to be…
Q: how to find ADF
A: ADF = present value annuity factor for 1$ PV = A * 1 - (1+r)-nr where , PV = ADF = present value…
Q: Suppose that your unsubsidized Stafford loans plus accumulated interest total $ 34000 at the time…
A: A loan is a contract where money is forwarded to one party by another on the promise of repayment at…
Q: In the market we observe the following term structure of continuously com- pounded spot rates: year…
A: Spot rates of different maturities have been provided. Several forward rates have to be calculated.…
Q: A firm has an opportunity to invest in a project that will have an initial cost of $800,000. The…
A: IRR stands for Internal Rate of Return, which is a financial metric used to evaluate the potential…
Q: Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options…
A: A customized portfolio has to be created with long and short positions in call options on the same…
Q: A bank has entered into a forward contract to sell 50,000 ounces of gold at $1,500 per ounce with a…
A: The bank will borrow the funds at the risk free rate and buy the gold at the current price. After…
Q: Each of the following factors may cause a corporation to lower its dividend payout ratio EXCEPT…
A: Net income of a corporation is used in either of two or both ways as mentioned below. To be paid as…
Q: Cullumber, Inc., management is considering purchasing a new machine at a cost of $3,960,000. It…
A: The Net present value is important decision making when it is said that the project cash inflow and…
Q: A stock has an average annual historical return of 14.69 percent and a standard deviation of 20.71…
A: Using Excel function NORMINV(probability,mean, standard deviation) We can calculate negative return.
Q: (7.8) The interest rate investors expect on a new bond issue can be determined by computing the for…
A: Bonds are fixed-income assets that serve as a representation of investor loans to borrowers…
Q: iven the following information, Ankit took home loan of $100,000 for 10 years. Interest Rate: 10%,…
A: Loan Installment is that equal amount which is paid by the borrower on monthly basis. Loan…
Q: Tank INC, is experiencing rapid growth. The company expects dividends to grow at 15 percent per year…
A: The dividend discount model will be used here. As per the dividend discount model the value of a…
Q: Basic scenario analysis Prime Paints is in the process of eva The firm's financial analysts have…
A: In order to calculate range of project we calculate the total cash flow of the project which is…
Q: Elona Zuckerberg is the CFO of Facenote company. made the following statements in a conference call…
A: The firm capital structure consists of sources of capital which include debt, preference and equity…
Q: 1- Examine equity markets 2- Calculate equity valuation 3- Evaluate equity valuation impacts
A: Equity markets are a type of financial market where stocks or shares of publicly traded companies…
Q: For the given corporate bond, whose annual simple interest rate is provided, find the semiannual…
A: Compound = Semiannually = 2 Principal Amount = p = $11,900 Time = t = 10 * 2 = 20 semiannual…
Q: (a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM).
A: The capital of set price in model is a method that is used to describe the relationship between the…
Q: NIKE, INC. 2 Consolidated Statement of Income 3 In $ Millions 5 6 7 Revenues • Cost of sales . Gross…
A: Financial ratios are determined using the parameters of financial statements. These ratios are used…
Q: p) demonstrate an understanding of the constructions of a synthetic call by identifying the…
A: Synthetic Options: Synthetic options are combinations of financial instruments that replicate the…
Q: A fund has an initial investment of $100 million from investors. The investors will receive an 8…
A: Internal rate of return is the modern method of capital budgeting that is used to determine the…
Q: Estimating the Market’s Expected Growth Rate in Dividends Mattel, Inc. was trading at a price of…
A: According to Gordon growth model, Po = Do * (1+g)ke -g where , Po = current market price Do =…
Q: Suppose you buy one SPX call option with a strike of 2085 and write one SPX put option with a strike…
A: You make money on a short put option only on the premium received on writing the put option,…
Q: Please answer question 4-b
A: It is specifically instructed to answer question 4 - b. Hence , answer to question 4 -b is provided.…
Q: Project B: Years 1-9 0 Present value of annuity Investment Project A Project B Net present value of…
A: We can determine the PV of cash inflows using the formula below: PV = annual cash inflow x PV…
Q: A corporate bond maturing in 15 years with a coupon rate of 9.9 percent was purchased for $980 and…
A: Here, Particulars Values Face value (FV) $ 1,000.00 Time to maturity (NPER) 15.00 Coupon…
Q: 5 years ago you borrowed $200,000 to buy a house. The interest rate quoted to you was 4.95 percent…
A: Every monthly payment will have two components in it, one the interest component and the other would…
Q: You have $10,100 to invest. You decide to invest $18,000 in Google and short sell $7,900 worth of…
A: Expected return represents the return expected by an investor for investing in the business of the…
Q: You are considering making a movie. The movie is expected to cost $ 10.2 million upfront and take…
A: Here, Year Cash flows (in $ million) 0 $ -10.20 1 $ 0 2 $ 4.40 3 $ 2.10 4 $ 2.10 5 $…
Q: What are the distinctions between operating, investing, and financing sources and uses of cash?
A: In financial accounting, sources and uses of cash refer to the ways in which a company acquires and…
Q: a) discuss the relationship between the up-factor (u), down-factor (d), risk-free rate (r), and…
A: In the binomial model, the up-factor (u) and down-factor (d) represent the possible movements of an…
Q: Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these two…
A: The payback Period represents the period in which the initial cost of investment of a project is…
Q: Please use Excel to solve: You have just purchased a share of stock for $20. The company is expected…
A: The ROI refers to the measurement of the profitability and efficiency of an investment by…
Q: Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current…
A: Current Cost of Equity = Risk Free Rate + Beta * Market Risk premium 15%= 3% +Beta* 6% Beta 6%= (15%…
Q: You are considering adding a new software title to those published by your highly successful…
A: Opportunity cost refers to the cost of choosing one option over another, based on the potential…
Q: ould you please answer question 4 and 5?
A: NPV refers to the value generated by a project and is represented in absolute profitability.
Q: ) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected…
A: . The equation of the Security Market Line (SML) is given by: Expected Return = Risk-Free Rate +…
Q: Question 5 Use the following information to complete all subsections of this question: Margo…
A: The variance between the current value of cash flows and withdrawals over a period of time is known…
Q: Good Time Company is a regional chain department store. It will remain in business for one more…
A: Probability of Boom=50% Probability of recession=50% Projected cash flow during the boom=$126…
Q: please help me with part E.
A: A question with multiple sub parts were asked by you earlier. One of the sub parts were not…
Q: Write the equation of the Security Market Line (SML). Compute and draw the SML when the expected…
A: The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model…
Q: Given only the information provided, which bond would you suspect of having the lowest duration?…
A: Several bonds have been provided along with their characteristics. We have to spot the bond with the…
Q: the expected returns of the stocks A and B.
A: Expected Return The expected return of the stock is the probability weighted return of the stock. ER…
Q: Gonzalez Company is considering two new projects with the following net cash flows. The company’s…
A: The payback Period represents the period in which the project will recover the cost of its initial…
Q: Assume that the real risk-free rate is 2.2% and that the maturity risk premium is zero. If a 1-year…
A: 1-year Treasury bond yield=5.2% 2-year Treasury bond yield=6.1% Risk-free rate=2.2% Required: 1-year…
Q: a) Fill in the empty boxes of the following Expected return E(r) Variance (0²) Standard Deviation…
A: Expected return is interchangeably used with average return in portfolio management. Where mean or…
2b) Write the equation of the Security Market Line (SML). Compute and draw the SML when the expected return of the NASDAQ index (market portfolio) is 17% and the return to the risk-free asset is 7%.
Step by step
Solved in 4 steps with 1 images
- Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%The following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%. Security N O P Return 20 21 23 Beta 1.2 1.8 0.82 Calculate the market risk premium, and the expected return of each asset using CAPM.Help me with part E please. Thank you so much a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655. (d) Facebook pays a dividend of 5 GBP and the growth of dividends is equal to 4%for the first two years and then rise to 6%. Assuming constant cost of capitalas computed in point (c), estimate the price of the Facebook share. (e) Consider investing 20% of your wealth in the Facebook share with beta as in, What is the proportion you need to allocate to the Apple share with beta1.8 in order to replicate the market portfolio?
- c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found to be half of the required return (Rs) on stock B. The risk-free rate (R:) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (Ba) to beta of B (B).Assume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei where Ri is the excess return for security i and RM is the market's excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data. Security Betai E(Ri) sigma(ei) A 1.4 15% 28% B 1.6 17% 14% C 1.8 19% 23% a. If simaM = 24%, calculate the variance of returns of securities A, B, and C (round to whole number). Variance Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C (enter the variance answers as a whole number decimal and the mean as a whole number percentage)? Mean Variance Security A ?% Security B ?% Security C ?%Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.4 14 % 23 % B 1.6 16 14 C 1.8 18 17 a. If σM = 22%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
- Assume that security returns are generated by the single-index model,Ri = αi + βiRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.7 7 % 20 % B 0.9 9 6 C 1.1 11 15 a. If σM = 16%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, what type of return should it realize compared to the market portfolio?c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). (10 marks)d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (10 marks)(Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)
- Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.Questions C and D is required. c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i ( , where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)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?