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 22SP
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(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.)
Given that the formula for CAPM is Expected return= risk free rate + Beta*(Return on market - risk free rate), Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984. If these securities are assumed to be correctly priced, what is their risk free rate? Based on CAPM, what is the return on the market?
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
0.67
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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- a.) 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(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_forwardThe 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.arrow_forward
- 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?arrow_forwardassume that the market consists of two securities. Security A has a market value of $1 billion and a covariance with the market portfolio of 0.15. Security B has a market value of $3 billion and a covariance with the market portfolio of 0.08. What is the standard deviation of the market portfolio?arrow_forwardSecurity A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984 - these securities are assumed to be correctly priced. Based on CAPM, what is the return on the market?arrow_forward
- a) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your resultsarrow_forwardThe risk-free rate and the expected market return are 5% and 12%, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 2 is equal to: a 19% b 29% c 12% d 10% e 15%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
- The Treasury bill rate is 4.9%, and the expected return on the market portfolio is 11.1%. Use the capital asset pricing model. What is the risk premium on the market? (Enter your answer as a percent rounded to 1 decimal place.) What is the required return on an investment with a beta of 1.2? (Enter your answer as a percent rounded to 2 decimal places.) If an investment with a beta of 0.46 offers an expected return of 8.7%, does it have a positive NPV? If the market expects a return of 12.2% from stock X, what is its beta? (Round your answer to 2 decimal places.)arrow_forward(d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forward2b) 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%.arrow_forward
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Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY