Question 1 Differentiate between the terms 'Systematic risk' and 'unsystematic risk. What is the meaning of
Fantastic news! We've Found the answer you've been seeking!
Question:
Question 1
Differentiate between the terms 'Systematic risk' and 'unsystematic risk.
What is the meaning of beta and what is it used for?
- The following information relating to a portfolio was given to you:
Stock | Percentage | Beta |
of portfolio | ||
1 | 40% | 1.00 |
2 | 25% | 0.75 |
3 | 35% | 1.50 |
The risk-free rate is 8 percent and the expected return on the market portfolio is 12 percent.
- Using CAPM formula, calculate the expected return for stocks 1, 2 and 3.
- Sketch the security market line (SML) and show where the securities fit on the graph.
- Interpret the results based on (ii) above and indicate which stock might be undervalued or overvalued
Related Book For
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-0078111044
16th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello
Posted Date: