a)
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with an average risky asset in the market.
b)
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
c)
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Assume the market return is 14% with a standard deviation of 20%, and risk-free rate is 8%. The average annual returns for Managers D, E, and F are 13%, 17%, and 16% respectively. The corresponding standard deviations are 18%, 22%, and 23%. What are the Sharpe ratios for the market and managers?arrow_forwardSuppose risk-free rate of return = 2%, market return = 7%, and Stock B’s return = 11%. a. Calculate Stock B’s beta. b. If Stock B’s beta were 0.80, what would be its new rate of return?arrow_forwardConsider a firm with a beta of 1.57. If the market return is 6.73% and the risk-free rate is 0.90%, what is the firm's expected return according to the capital asset pricing model? Round your answer to four decimal places, e.g., enter 12.34 for 12.34%.arrow_forward
- Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.arrow_forwardConsider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 39% probability that the firm will have a 27 % return and a 61 % probability that the firm will have a-18% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in: a. 22 firms of type S? b. 22 firms of type I? a. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 22 firms of type S? Standard deviation is %. (Round to two decimal places.) b. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 22 firms of type I? Standard deviation is _ %. (Round to two decimal places.)arrow_forwardSuppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 41%. Portfolios A and B are both well diversified. Portfolio Beta on M₁ Beta on M₂ Expected Return (%) A B 1.8 2.2 2.3 -0.5 31 9 What is the expected return-beta relationship in this economyarrow_forward
- Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?arrow_forwardSuppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.arrow_forwardA firm has a beta of 0.6. If the return on the market is 9% and the risk-free return is 2%, then what is the firm's required return? a. 4.22% b. 6.20% c. 7.40% d. 2.42%arrow_forward
- (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forwardSuppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.9 2.2 33 % B 2.8 –0.22 28 % What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.)E(rP) = rf + (βP1 × RP1) + (βP2 × RP2)arrow_forwardConsider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 49% probability that the firm will have a 30% return and a 51% probability that the firm will have a - 7% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in: a. 31 firms of type S? b. 31 firms of type I?arrow_forward
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