Problem 1:

Using the capital asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the return on assets is free of risk is 1.25% (RF = 1.25%). You must show all calculations to receive the score.

Active beta

SKT 0.65

COST 0.90

ITS 1.42

AMZN 1.57

V 0.94

Problem 2:

If the risk-free return on the asset is 2.25% (RF = 2.25%) and the market return is 6.50% (Rm = 6.50%), how much is the beta of Bank of America, BAC, if it has had a return? of 9.14%? You must show all calculations to receive the score.

Problem 3:

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

a. Which asset 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 add it to an investment portfolio in a greater proportion than all other assets?

b. Which asset represents the least sensitive 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 a greater proportion than all other assets?