Problem 1:

Using the Capital Asset Pricing Model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.75% (Rm = 7.75%) and the risk-free asset return is 1.20% (RF = 1.20%). You must show all computations to receive points. (15 points)

Active Beta SKT 0.75 COST 0.95 ITS 1.45 AMZN 1.75 V 0.92

Formula: E(Ri) = Rf + [ E(Rm) Rf] i

Active SKT: E(Ri) = 1.20 + [ 7.75 - 1.20] .75

E(Ri) = 6.1125

****You must do it with the rest of the assets. Remember to change the beta****

Problem 2:

If the return on the risk-free asset is 2.50% (RF = 2.50%) and the market return is 6.4% (Rm = 6.4%), what is the beta of Bank of America, BAC, if it has had a return of 9.25%? You must show all computations to receive points. (5 points)

You must follow step by step the formula to determine the beta (slide 7 of the PowerPoint presentation).

Problem 3: To answer see comment at the end

Consider the assets in problem 1 with their respective beta coefficients to answer the following questions:

Which of the assets represents the most sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have if you added it to an investment portfolio in greater proportion than all other assets? (5 points) Which of the assets represents the least sensitivity to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have, if you add it to an investment portfolio in greater proportion than all other assets? (5 points) Important:

To answer questions 3 (a and b), consider the following information:

If the Beta of an asset is greater than 1, it has a greater systemic risk than the market, and amplifies its movements. The asset would be more volatile. For example, in a period of loss or depreciation, the asset would have more losses than the market as a whole. The other way around when it is a bullish period.

If the opposite happens, and Beta is less than 1, it means that the asset has less systemic risk than the market, it is less volatile than the general trend.

Finally, if the value is negative, it means that the relationship is inverse. That is to say, that the profitability of the asset will increase when that of the market falls and vice versa.