The current market price of Walters is £60 per share, its expected return is 13%, the riskless rate of interest is 12%, and the market risk premium [E(Rm - Rf)] is 9%. Suppose the expected future payoff of Walters remains the same but the covariance of its rate of return with the market portfolio doubles. Based on the CAPM, answer the following questions (show all the details of your calculation, explain intermediate results, and show your results with 4 decimal places).

 

i. What is Walter's rate of return?

 

ii. What is Walter's current price? 

Answer rating: 100% (QA)

SOLUTION i To calculate the new expected return of Walters we first need to calculate its beta using the CAPM formula beta CovRi Rm VarRm where Ri is ... View the full answer