EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 9, Problem 21PS
a.
Summary Introduction
To determine: The
Introduction: The
B.
Summary Introduction
To determine: The expected rate of return on stock
Introduction: The Capital Asset Pricing Model explains the relationship among the systematic risk of an asset and the return that are expected.
C.
Summary Introduction
To determine: the stock is overpriced or underpriced.
Introduction: The Capital Asset Pricing Model explains the relationship among the systematic risk of an asset and the return that are expected.
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Students have asked these similar questions
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:a. What is the expected rate of return on the market portfolio?b. What would be the expected rate of return on a stock with β = 0?c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = −.5. Is the stock overpriced or underpriced?
1) Suppose the rate of return on short-term government securities (perceived to be risk-free)
is about 5%. Suppose also that the expected rate of return required by the market for a
portfolio with a beta of 1 is 12%. According to the capital asset pricing model:
a) What is the expected rate of return on the market portfolio?
b) What would be the expected rate of return on a stock with a beta of 0?
c) Suppose you consider buying a share of stock at $40. The stock is expected to pay
$3 dividends next year and you expect it to sell then for $41. The stock risk has been
evaluated at .5. Is the stock overpriced or underpriced
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model:
a. What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places.)
b. What would be the expected rate of return on a stock with β = 0? (Round your answer to 2 decimal places.)
c. Suppose you consider buying a share of stock at $47. The stock is expected to pay $3.5 dividends next year and you expect it to sell then for $49. The stock risk has been evaluated at β = –.5. Is the stock overpriced or underpriced?
A. Underpriced
B. Overpriced
Chapter 9 Solutions
EBK INVESTMENTS
Ch. 9 - Prob. 1PSCh. 9 - Prob. 2PSCh. 9 - Prob. 3PSCh. 9 - Prob. 4PSCh. 9 - Prob. 5PSCh. 9 - Prob. 6PSCh. 9 - Prob. 7PSCh. 9 - Prob. 8PSCh. 9 - Prob. 9PSCh. 9 - Prob. 10PS
Ch. 9 - Prob. 11PSCh. 9 - Prob. 12PSCh. 9 - Prob. 13PSCh. 9 - Prob. 14PSCh. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Prob. 21PSCh. 9 - Prob. 22PSCh. 9 - Prob. 23PSCh. 9 - Prob. 24PSCh. 9 - Prob. 1CPCh. 9 - Prob. 2CPCh. 9 - Prob. 3CPCh. 9 - Prob. 4CPCh. 9 - Prob. 5CPCh. 9 - Prob. 6CPCh. 9 - Prob. 7CPCh. 9 - Prob. 8CPCh. 9 - Prob. 9CPCh. 9 - Prob. 10CPCh. 9 - Prob. 11CPCh. 9 - Prob. 12CP
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- Assume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock. Your research shows the following: Beta = βi = 1.54 Risk free rate = Rf = 2.5% per year Market return = E(RM) = 6.5% per year Based on this information, answer the following: A. Based on the beta, how does the stock's risk compare to the market overall? On what do you base your answer? B. Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall? Why? C. According to the CAPM and the information given above, what is the expected return E(Ri) for this stock? D. If the required rate of return on this stock were 7% per year, would you invest? Why or why not?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_forwarda) Suppose the risk-free rate is 5% 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 results b)Stock 1 has a standard deviation of return of 6%. Stock 2 has a standard deviation of return of 2%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question b) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of…arrow_forward
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