Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an
Question:
Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. The Client presently owns a bond portfolio with $1 million invested in zero coupon Treasury bonds that mature in 10 years. (The total par value at maturity is $1.79 million and yield to maturity is about 6%, but that information is not necessary for the mini case.) You have calculated the rate of return on 10-year zero coupon for each scenario.
Historical Stock Returns
The Risk Free Rate is 4% and the market risk premium is 5%
Suppose instead that investors? risk aversion increased enough to cause the market risk premium to increase by 3 percentage points. (Assume the risk-free rate remains constant.) What effect would this have on the SML and on returns of high- and low-risk securities?
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham