Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return variance of a stock return could be decomposed into systematic (i.e. market risk) variance and firm specific variance. Consider the following assets: Asset A B C D Expected Return 10.00% 9.00% 14.00% 8.50% Total Return Variance Firm Specific Variance 0.3844 0.2548 0.5476 0.4576 0.3600 0.0000 1.4225 0.8600 1. A risk-averse investor with a well-diversified portfolio is considering adding asset A or asset B to his/her portfolio. S/he would like to choose the one with lower systematic risk. Which asset would you recommend? Show your calculations. 2. Suppose that asset C has a beta of 1 and is correctly priced. Is asset D correctly priced? If not, overpriced or underpriced? Show your calculation. Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return variance of a stock return could be decomposed into systematic (i.e. market risk) variance and firm specific variance. Consider the following assets: Asset A B C D Expected Return 10.00% 9.00% 14.00% 8.50% Total Return Variance Firm Specific Variance 0.3844 0.2548 0.5476 0.4576 0.3600 0.0000 1.4225 0.8600 1. A risk-averse investor with a well-diversified portfolio is considering adding asset A or asset B to his/her portfolio. S/he would like to choose the one with lower systematic risk. Which asset would you recommend? Show your calculations. 2. Suppose that asset C has a beta of 1 and is correctly priced. Is asset D correctly priced? If not, overpriced or underpriced? Show your calculation.
Expert Answer:
Answer rating: 100% (QA)
1 To determine which asset has lower systematic risk we need to calculate the beta of each asset The ... View the full answer
Related Book For
Financial reporting, financial statement analysis and valuation a strategic perspective
ISBN: 978-0324789416
7th Edition
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
How do you identify the potential classes in a problem domain description?
-
A poster is to have an area of 180 in with 1-inch margins at the bottom and sides and a 2-inch margin at the top. What dimensions will give the largest printed area?
-
A rectangular loop of dimensions and w moves with a constant velocity v away from a long wire that carries a current I in the plane of the loop (Fig. P31.64). The total resistance of the loop is R....
-
Locate a sample memorandum of points and authorities at www.courts.ca.gov. What information did the memorandum contain? What was the motion about?
-
State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows: a. Retired $500,000 of bonds, on which there was $5,000 of...
-
Microsoft Azure is a cloud computing service created by Microsoft. It primarily provides software as a service, platform as a service, and infrastructure as a service. It provides a wide range of...
-
Mary is planning her wedding and develops the following preliminary information. For this problem, the normal times have been changed from OM3 a. Draw the network for this project. b. What is the...
-
The HIPAA Privacy Rule authorizes patients and insureds of covered entities who believe that their health information confidentiality rights have been violated to complain to: The covered entity...
-
World news is filled with stories about how large manufacturing firms are withdrawing from foreign markets due to increased pressure to reduce reliance on outsourcing and increase production at home....
-
The past five monthly returns for Kohls are 3.54 percent, 3.62 percent, -1.68 percent, 9.25 percent, and -2.56 percent. Compute the standard deviation of Kohls' monthly returns. Note: Do not round...
-
Determine if the given system is consistent. Do not completely solve the system. 3X1 9x1 X2 + +9x3 = 15 - 3x4 = 3 -5x2 +9x3 + 3x4 = 5 + -7x4 = -4
-
Questions 1 (25 points) Victoria Curro, R/GA Australia's (a global digital product and marketing company) managing director, explores the changes taking place in Australian society, the effect it's...
-
= Let f(x) 15. Calculate the following values: f(a) = = f(a+h) = = f(a + h) - f(a) h for h 0
-
You work for a household appliance store, and your manger has asked you to prepare a sales report based on the information contained in the following table. Include a recommendation section for your...
-
Which of the ocean zones shown would be home to each of the following organisms: lobster, coral, mussel, porpoise, and dragonfish? For those organisms you identify as living in the pelagic...
-
If the firm borrows capital from a bank and invests it in assets that earn a return greater than the interest rate charged by the bank, what effect will that have on residual income for the firm? How...
-
Gap Inc. operates chains of retail clothing stores under the names of Gap Banana Republic, and Old Navy. Exhibit 3.24 presents the statement of cash flows for Gap for Year 0 to Year 4. Required...
-
The following data represent total assets, book value, and market value of common shareholders equity (dollar amounts in millions) for three firms. Each of these firms, Southwest Airlines, Kroger,...
-
What is the purpose of tests of controls?
-
Why are some tests of controls performed during the interim period?
-
What four factors should the auditor consider in deciding what evidence, if any, needs to be obtained during the period from the interim date to the balance sheet date?
Study smarter with the SolutionInn App