whether following statement is true or false- "Stock with Beta of zero offers an expected rate of return of zero." Introduction: Beta of a stock represents the sensitivity of its return with the change in the market return.

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Answer 1

Question

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

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Are the following true or false? Explain. Stocks with a beta of zero offer an expected rate of return of zero. The CAPM implies that investors require a higher return to hold highly volatile securities. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

Questions C and D is required. Thank you.c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i ( , where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)

Questions C is required. Thank you.c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B).

Answer 2

Question

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

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Answer 3

Question

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Expert Solution & Answer

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Answer 4

Question

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Expert Solution & Answer

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Answer 5

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Answer 6

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Answer 7

Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Answer 8

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Answer 9

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Answer 10

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Answer 11

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 9 - Prob. 1PS Ch. 9 - Prob. 2PS Ch. 9 - Prob. 3PS Ch. 9 - Prob. 4PS Ch. 9 - Prob. 5PS Ch. 9 - Prob. 6PS Ch. 9 - Prob. 7PS Ch. 9 - Prob. 8PS Ch. 9 - Prob. 9PS Ch. 9 - Prob. 10PS

whether following statement is true or false- "Stock with Beta of zero offers an expected rate of return of zero." Introduction: Beta of a stock represents the sensitivity of its return with the change in the market return.

Solution Summary: The author explains that a risk free stock such as T-bills has beta of zero as their return will not change due to change in the market return.

Concept explainers

Videos

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.

Want to see the full answer?

Chapter 9 Solutions

whether following statement is true or false- "Stock with Beta of zero offers an expected rate of return of zero." Introduction: Beta of a stock represents the sensitivity of its return with the change in the market return.

Solution Summary: The author explains that a risk free stock such as T-bills has beta of zero as their return will not change due to change in the market return.

Concept explainers

Videos

To determine: whether following statement is true or false- "Stock with Beta of zero offers an expected rate of return of zero." Introduction: Beta of a stock represents the sensitivity of its return with the change in the market return.

(C) To determine: whether following statement is true or false- "You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio." Introduction: Beta of the portfolio is the weighted average beta.

Want to see the full answer?

Chapter 9 Solutions

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.