Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 6, Problem 15SP
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2. Using the capital asset pricing model (CAPM), estimate
the appropriate required rate of return for the following
three stocks, assuming that the risk-free rate (rRF) is 5
percent and the expected return for the market (rM) is 17
percent. Please show all work. Stock Beta (?) A 0.75 B 0.90
C 1.40
(Capital Asset Pricing Model) The expected return for the general market is
10.5
percent, and the risk premium in the market is
6.8
percent. Tasaco, LBM, and Exxos have betas of
0.809,
0.677,
and
0.578,
respectively. What are the appropriate expected rates of return for the three securities?
Question content area bottom
Part 1
The appropriate expected return of Tasaco is
enter your response here%.
(Round to two decimal places.)
Part 2
The appropriate expected return of LBM is
enter your response here%.
(Round to two decimal places.)
Part 3
The appropriate expected return of Exxos is
enter your response here%.
(Round to two decimal places.)
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.
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
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- 8. Assume the risk-free rate is 6.7% and the expected return on the market portfolio is 7.8%. Use the capital asset pricing model (CAPM) to find the required return for each of the securities in the table here, 7. Review On Click the icon to see the Worked Solution. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.) The required return for investment C is %. (Round to one decimal place.) The required return for investment D is %. (Round to one decimal place.) The required return for investment E is %. (Round to one decimal place.) 7: Data Table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security Beta A 1.34 в 0.93 0.13 0.96 E 0.67arrow_forwardUsing the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 4 percent and the expected return for the market is 17 percent. STOCK BETA A 0.63 B 0.95 C 1.48 a. Using the CAPM, the required rate of return for stock A is B.Using the CAPM, the required rate of return for stock b is C.Using the CAPM, the required rate of return for stock C is (Round to two decimal places.)arrow_forward(Capital Asset Pricing Model) The expected return for the general market is 13.0 percent, and the risk premium in the market is 9.3 percent. Tasaco, LBM, and Exxos have betas of 0.895, 0.602, and 0.518, respectively. What are the appropriate expected rates of return for the three securities? The appropriate expected return of Tasaco is%. (Round to two decimal places.)arrow_forward
- (Capital Asset Pricing Model) The expected return for the general market is 13.0 percent, and the risk premium in the market is 9.5 percent. Tasaco, LBM, and Exxos have betas of 0.842, 0.689, and 0.547, respectively. What are the appropriate expected rates of return for the three securities? The appropriate expected return of Tasaco is %. (Round to two decimal places.) The appropriate expected return of LBM is%. (Round to two decimal places.) The appropriate expected return of Exxos is%. (Round to two decimal places.) 2 *** W S X ommand # m 3 SO P3 E D $ 4 C 990 GOD F4 R F % es 5 V FS T G 6 MacBook Air B F6 Y Question Viewer & 8 r 7 H ( 44 F7 U N * 8 J D-11 FR M ( 9 K MOSISO 19 O 1 command : . ; 4 + I = " ? option 40 VYZ { J DI ( Next . 1 "A and Me dele rearrow_forwardHelp 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?arrow_forwarda.) Using Capital Asset Pricing Model (CAPM) to compute an appropriate rate of return for Intel common stock, which has a beta of 1.2. The risk-free rate is 2%, and the market portfolio (NYSE stocks) has an expected return of 11%.arrow_forward
- For 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 0.6arrow_forwardb) You are given the following information about Stock X and the market: The annual effective risk-frec rate is 5%. The expected return and volatility for Stock X and the market are shown in the table below: Expected Return Volatility Stock X 5% 40% Market 8% 25% The correlation between the returns of stock X and the market is -0.25. Assume the Capital Asset Pricing Model holds. Calculate the required return for Stock X and determine if the investor should invest in Stock X.arrow_forwardConsider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. (a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium. (b) Draw the security market line, showing the positions of stocks A and B, as well as the risk-free rate and the market portfolio on the plot. You are not required to draw the security market line to scale. (c) Consider stock C that has an expected return of 30%, a beta of 2.3, and a standard deviation of returns of 20%. According to the CAPM, calculated in part (a) above, is stock C overpriced, underpriced, or correctly priced? What would you recommend to investors? (d) Briefly explain the definition of market portfolio in a CAPM economyarrow_forward
- Suppose that the capital asset pricing model (CAPM) applies. The risk premium of a stock is 3 percent and the risk premium of the market portfolio is 2. The standard deviation of the market portfo- lio is 6. Compute the covariance between the stock and the market portfolio.arrow_forwardSuppose you are given the following inputs for the Fama-Frech-3-Factor model. Required Return for Stock i: bi=0.8, kRF=8%, the market risk premium is 6%, ci=-0.6, the expected value for the size factor is 5%, di=-0.4, and the expected value for the book-to-market factor is 4%. Task: Estimate the required rate of return of this asset using the Capital asset pricing model and compare it with the Fama-French-3-factor model.arrow_forward(Capital Asset Pricing Model) CSB, Inc. has a beta of 0.758. If the expected market return is 10.5 percent and the risk-free rate is 6.5 percent, what is the appropriate expected return of CSB (using the CAPM)? The appropriate expected return of CSB is%. (Round to two decimal places.)arrow_forward
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