Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 25, Problem 2Q
Summary Introduction
Identify: More risky security between A and B.
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Which of the following statements about the Security Market Line are correct?
I. The intercept point is the market rate of return.
II. The slope of the line is beta.
III. An investor should accept any return located above the SML line.
IV. A beta of 0.0 indicates the risk-free rate of return
Security A has an expected rate of return of 6%, a standard deviation ofreturns of 30%, a correlation coefficient with the market of 20.25, and abeta coefficient of 20.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, anda beta coefficient of 0.5. Which security is more risky? Why?
The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model, the expected rate of return of a security, that you are interested in, has a beta of 1.25 would be equal to
Calculate the expected rate of return
Chapter 25 Solutions
Financial Management: Theory & Practice
Ch. 25 - Define the following terms, using graphs or...Ch. 25 - Prob. 2QCh. 25 - The standard deviation of stock returns for Stock...Ch. 25 - Prob. 2PCh. 25 - Stock A has an expected return of 12% and a...Ch. 25 - Prob. 4PCh. 25 - Prob. 7SPCh. 25 - Prob. 1MCCh. 25 - Prob. 2MCCh. 25 - Prob. 3MC
Ch. 25 - You have been hired at the investment firm of...Ch. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 6MCCh. 25 - You have been hired at the investment firm of...Ch. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 9MCCh. 25 - You have been hired at the investment firm of...Ch. 25 - Prob. 11MC
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- Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of −0.3, and a beta coefficient of −1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?arrow_forwardSecurity A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.) b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6%, what is the value of rM?arrow_forwardConsider the following information (Assume that Security M and Security N are in the same financial market and the market is efficient): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security has more systematic risk? Group of answer choices Security M Security N Equalarrow_forward
- Security A offers an expected rate of return of 12% with a standard deviation of 18%, and security B offers an expected return of 6% with a standard deviation of 25%. Obviously, security B is inferior to security A with respect to both mean return and standard deviation. Assume investors are risk-averse, why would anyone hold security B?arrow_forwardSecurity A has an expected return of 7%, a standard deviation of returns of35%, a correlation coefficient with the market of 20.3, and a beta coefficientof 21.5. Security B has an expected return of 12%, a standard deviation ofreturns of 10%, a correlation with the market of 0.7, and a beta coefficient of1.0. Which security is riskier? Why?arrow_forwardmultiple choice, Security X has an expected rate of return E(R) of 0.11 and a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.08. According to the Capital Asset Pricing Model (CAPM), this security is underpriced. overpriced. fairly priced. cannot be determined from data provided.arrow_forward
- A security has an expected rate of return of 0.11 and has a beta (B) of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. Show whether this security is underpriced, fairly priced or overpriced. 1. The returns on share A follow the market model with coefficients aa = 0.01, Ba = 1.25. If at time t, K MT = 0.02 and the actual return on share A is 0.025, calculate EAt (the error term). 2. 3. An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a risk-free asset with a return of 0.06. Calculate the portfolio's expected return. 4. Toyota stock has the following probability distribution of expected prices one year from now: State Probability Price 1 25% 40% £50 2 £60 3 35% £70 Currently, each share is priced at £55. Toyota will pay a dividend of £4 per share at the end of the year. What is your expected holding-period return on Toyota? 5. According to the Capital Asset…arrow_forwardWhat 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?arrow_forwardIf the market portfolio has a required return of 0.12 and a standard deviation of 0.40, and the riskfreerate is 0.04, what is the slope of the security market line?arrow_forward
- What is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of return.c. Negative rate of return.d. Risk-free rate of return.arrow_forwardThe 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?arrow_forwardSecurity A has an expected rate of return of 22% and a beta of 2.5. Security B has a beta of 1.2. If the risk-free rate is 10%, what is the expected rate of return of security B?arrow_forward
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