Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return...
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Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return variance of a stock return could be decomposed into systematic (i.e. market risk) variance and firm specific variance. Consider the following assets: Asset A B C D Expected Return 10.00% 9.00% 14.00% 8.50% Total Return Variance Firm Specific Variance 0.3844 0.2548 0.5476 0.4576 0.3600 0.0000 1.4225 0.8600 1. A risk-averse investor with a well-diversified portfolio is considering adding asset A or asset B to his/her portfolio. S/he would like to choose the one with lower systematic risk. Which asset would you recommend? Show your calculations. 2. Suppose that asset C has a beta of 1 and is correctly priced. Is asset D correctly priced? If not, overpriced or underpriced? Show your calculation. Suppose that the relevant equilibrium model is CAPM and the risk-free rate is 4%. Total return variance of a stock return could be decomposed into systematic (i.e. market risk) variance and firm specific variance. Consider the following assets: Asset A B C D Expected Return 10.00% 9.00% 14.00% 8.50% Total Return Variance Firm Specific Variance 0.3844 0.2548 0.5476 0.4576 0.3600 0.0000 1.4225 0.8600 1. A risk-averse investor with a well-diversified portfolio is considering adding asset A or asset B to his/her portfolio. S/he would like to choose the one with lower systematic risk. Which asset would you recommend? Show your calculations. 2. Suppose that asset C has a beta of 1 and is correctly priced. Is asset D correctly priced? If not, overpriced or underpriced? Show your calculation.
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1 To determine which asset has lower systematic risk we need to calculate the beta of each asset The ... View the full answer
Related Book For
Financial reporting, financial statement analysis and valuation a strategic perspective
ISBN: 978-0324789416
7th Edition
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw
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