# Question

Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent.

Stock Beta

K .......... 1.12

G .......... 1.3

B .......... 0.75

U .......... 1.02

a. Using the CAPM, what rates of return should Grace require for each individual security?

b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4.5 percent and the market risk premium were to be only 5 percent?

c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.

Stock Beta

K .......... 1.12

G .......... 1.3

B .......... 0.75

U .......... 1.02

a. Using the CAPM, what rates of return should Grace require for each individual security?

b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4.5 percent and the market risk premium were to be only 5 percent?

c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.

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