Use the information for securities X, Y and Z in the table below to answer parts...
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Use the information for securities X, Y and Z in the table below to answer parts a and b. Security X Security Z 8% 18% 0.75 Security Y 8% 1.25 Expected return Beta 2.5 The risk-free rate is 3%, and the expected return of the market portfolio is 9%. b. a. According to the CAPM, are these securities overpriced, fairly priced, or underpriced? Using the CAPM, calculate the abnormal return of a portfolio that takes a long position in security X by $35,000, a short position in security Y by $15,000, and a long position in security Z by $5,000. c. You have $100,000 and you want to set up a portfolio of security X and security Y with an abnormal return of 1.4% based on the CAPM. Specify the position to be taken (long or short) and the dollar amount to be invested in each security. Use the information for securities X, Y and Z in the table below to answer parts a and b. Security X Security Z 8% 18% 0.75 Security Y 8% 1.25 Expected return Beta 2.5 The risk-free rate is 3%, and the expected return of the market portfolio is 9%. b. a. According to the CAPM, are these securities overpriced, fairly priced, or underpriced? Using the CAPM, calculate the abnormal return of a portfolio that takes a long position in security X by $35,000, a short position in security Y by $15,000, and a long position in security Z by $5,000. c. You have $100,000 and you want to set up a portfolio of security X and security Y with an abnormal return of 1.4% based on the CAPM. Specify the position to be taken (long or short) and the dollar amount to be invested in each security.
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a According to the CAPM to determine if the securities are overpriced fairly priced or underpriced we need to compare the expected return Er calculated using the CAPM formula to the actual expected return for each security The CAPM formula is Er Rf Beta Ermarket Rf For each security Security X ErX 3 075 9 3 65 So Security X is overpriced since its expected return 8 is higher than the CAPMcalculated expected return 65 Security Y ErY 3 125 9 3 85 So Security Y is fairly priced as its expected return 8 is close to the CAPMcalculated expected return 85 Security Z ErZ 3 25 9 3 165 So Security Z is underpriced because its expected return 18 is lower than the CAPMcalculated expected return 165 b To calculate ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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