The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Using
Question:
The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Using the capital asset pricing model:
a. Draw a graph similar to Figure showing how the expected return varies with beta.
b. What is the risk premium on the market?
c. What is the required return on an investment with a beta of 1.5?
d. If an investment with a beta of .8 offers an expected return of 9.8%, does it have a positive NPV?
e. If the market expects a return of 11.2% from stock X, what is itsbeta?
Expected return on investment Security market line Market portfolio Treasury bills beta (β) 1.0
Step by Step Answer:
a b Market risk premium r m r f 012 004 008 80 c Use the s...View the full answer
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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