Assume that the data are representative of the future so that the returns obtained on firm A
Question:
Assume that the data are representative of the future so that the returns obtained on firm A and the S&P 500 are the same as their expected returns. Complete the following questions:
a. The S&P 500 is a measure of the market. The market is average (by definition), so what is its beta?
b. The risk-free assets has no risk (by definition), so what is its beta?
c. Firm A, the S&P 500, and the risk-free asset should all be on the SML. The expected return for the risk-free asset can be calculated using the Forecast function. The X is risk-free beta, the known Ys are the returns on firm A and the S&P 500, and the known Xs are the betas for the same two.
d. Calculate the market risk premium.
e. From the results of (c) and (d) give the equation of the SML.
f. Use the SML from d to calculate the expected return on asset B in the return column in the first row for firm B.
g. Firm A the S&P 500, and the risk-free asset should all be on the SML. The return for firm B can also be calculated using the Forecast function. The X is firm B's beta, the known Ys are the returns on firm A, the S&P 500, and the risk-free asset, and the known Xs are the betas for the same three. Put the Forecast calculation in the return column in the second row for firm B. Is the result the same as (e).
Beta | Return | |
Firm A | 0.32 | 6.20% |
S&P 500 | A | 9.70% |
Risk-Free asset | B | C |
Firm B | 1.23 | F |
Firm B | 1.23 | G |
MRP | D |
Modern Portfolio Theory and Investment Analysis
ISBN: 978-1118469941
9th edition
Authors: Edwin Elton, Martin Gruber, Stephen Brown, William Goetzmann