What do you mean by Security Market Line? Suppose the risk- free rate goes down to...

 

Transcribed Image Text:

What do you mean by Security Market Line? Suppose the risk- free rate goes down to 7%. What effect would higher interest rates have on the SML and on the returns required on high-risk and low-risk securities? (2) Suppose instead that investors' risk aversion increased enough to cause the market risk premium to increase to 8%. What effect would this have on the SML and on returns of high- and low-risk securities? Question 2 Mr. Ali wants to invest his savings in different securities. He has obtained following information about historical prices. Years Company A Company B 2019 110 120 2020 200 100 2021 140 130 2022 160 180 Required: You are required to analyze the above given information and recommend him the companies in which he can invest. On the Basis of Arithmetic Mean which security will be selected? . On the Basis of Geometric Mean which security will be selected? . On the Basis of Standard Deviation which security will be selected? . On the basis of Coefficient of Variation, which security will be selected? . Why Arithmetic Mean and Geometric Mean gives different results? Question 3 You expect an RFR of 8 percent and the market return (RM) of 12 percent. Compute the expected (required) return for the following stocks, and plot them on Capital Market Line graph. And indicate what actions you would take with regard to these stocks. Discuss your decisions. Stock Current Price Expected Price Expected Dividends Beta A 22 26 2.75 0.75 B 48 53 2 1.5 C 37 42 4 0.30) D 30 27 1 1.75 What do you mean by Security Market Line? Suppose the risk- free rate goes down to 7%. What effect would higher interest rates have on the SML and on the returns required on high-risk and low-risk securities? (2) Suppose instead that investors' risk aversion increased enough to cause the market risk premium to increase to 8%. What effect would this have on the SML and on returns of high- and low-risk securities? Question 2 Mr. Ali wants to invest his savings in different securities. He has obtained following information about historical prices. Years Company A Company B 2019 110 120 2020 200 100 2021 140 130 2022 160 180 Required: You are required to analyze the above given information and recommend him the companies in which he can invest. On the Basis of Arithmetic Mean which security will be selected? . On the Basis of Geometric Mean which security will be selected? . On the Basis of Standard Deviation which security will be selected? . On the basis of Coefficient of Variation, which security will be selected? . Why Arithmetic Mean and Geometric Mean gives different results? Question 3 You expect an RFR of 8 percent and the market return (RM) of 12 percent. Compute the expected (required) return for the following stocks, and plot them on Capital Market Line graph. And indicate what actions you would take with regard to these stocks. Discuss your decisions. Stock Current Price Expected Price Expected Dividends Beta A 22 26 2.75 0.75 B 48 53 2 1.5 C 37 42 4 0.30) D 30 27 1 1.75

Answer rating: 100% (QA)

Effects of Changes in RiskFree Rate If the riskfree rate decreases to 7 it will lower the intercept of the SML Consequently the returns required on highrisk securities those with higher betas would de... View the full answer