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 9.5 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.)
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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
0.67
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_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_forwardSee Attachedarrow_forward
- assume 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_forwarda) 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_forwardPlease see attached.arrow_forward
- The 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_forwardThe 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
- Consider the following data for two risk factors (1 and 2) and two securities (J and L):λ0 = 0.07 λ1 = 0.04 λ2 = 0.06bJ1 = 0.10 bJ2 = 1.60 bL1 = 1.80 bL2 = 2.45a. Compute the expected returns for both securities. b. Suppose that Security J is currently priced at $50 while the price of Security L is $15.00.Further, it is expected that both securities will pay a dividend of $0.95 during the coming year.What is the expected price of each security one year from now? c. Compute the correlation between stock A and stock B considering the following data.Standard deviation of stock A = 10 percentStandard deviation of stock B = 17 percentCovariance between the two stocks = 90.arrow_forwarda) Suppose the risk-free rate is 7% 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 b) explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model.arrow_forwardSuppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.arrow_forward
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