The following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%. Security N O P Return 20 21 23 Beta 1.2 1.8 0.82 Calculate the market risk premium, and the expected return of each asset using CAPM.
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The following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%.
|
Security |
N |
O |
P |
|
Return |
20 |
21 |
23 |
|
Beta |
1.2 |
1.8 |
0.82 |
Calculate the market risk premium, and the expected
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- Consider the following data for two risk factors (1 and 2) and two securities (J and L):λ0 = 0.07 λ1 = 0.04 λ2 = 0.06bJ1 = 0.10 bJ2 = 1.60 bL1 = 1.80 bL2 = 2.45a. Compute the expected returns for both securities. b. Suppose that Security J is currently priced at $50 while the price of Security L is $15.00.Further, it is expected that both securities will pay a dividend of $0.95 during the coming year.What is the expected price of each security one year from now? c. Compute the correlation between stock A and stock B considering the following data.Standard deviation of stock A = 10 percentStandard deviation of stock B = 17 percentCovariance between the two stocks = 90.assume that the market consists of two securities. Security A has a market value of $1 billion and a covariance with the market portfolio of 0.15. Security B has a market value of $3 billion and a covariance with the market portfolio of 0.08. What is the standard deviation of the market portfolio?Given that the formula for CAPM is Expected return= risk free rate + Beta*(Return on market - risk free rate), Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984. If these securities are assumed to be correctly priced, what is their risk free rate? Based on CAPM, what is the return on the market?
- Security A has a beta of 1.16 and an expected return of .1137 and Security B has a beta of .92 and expected return of .0984 - these securities are assumed to be correctly priced. Based on CAPM, what is the return on the market?Suppose you observe the following situation on two securities:Security Beta Expected Return Pete Corp. 0.8 0.12 Repete Corp. 1.1 0.16 Assume these two securities are correctly priced. Based on the CAPM, what is the return on the market?The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?
- Assume that you are given the following partial covariance and correlation matrices for Securities J, K and the Market. Also assume that the expected risk-free rate for the coming year is 3.0 percent and that the expected risk premium on the market is 7.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. J Market Correlation J K Market Covariance J K Market Standard Deviation O 18.48% O 20.20% O 15.48% O 12.71% O 15.04% 0.44 0.86 J 0.014400 J K 0.64 K CAN 0.016900 K 1.00 Market 0.003600 MarketAssume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei where Ri is the excess return for security i and RM is the market's excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data. Security Betai E(Ri) sigma(ei) A 1.4 15% 28% B 1.6 17% 14% C 1.8 19% 23% a. If simaM = 24%, calculate the variance of returns of securities A, B, and C (round to whole number). Variance Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C (enter the variance answers as a whole number decimal and the mean as a whole number percentage)? Mean Variance Security A ?% Security B ?% Security C ?%For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market is 7 percent. You are also given the following covariance matrix for Securities J,K, andL. \table[[Covariance,Security J,Security K,Security L],[Security J,0.0012532,0.0010344,0.0019711],[Security K,0.0010344,0.0023717,0.0013558],[Security L,0.0019711,0.0013558,0.0048442]] Also assume that you form a portfolio by putting 0 percent of your funds in Security J, 40 percent of your funds in Security K, and 60 percent of your funds in Security L. Based on this information, determine the standard deviation of the resulting portfolio. ◻ 6.47% 5.27% 4.98% 5.82% 4.77%
- For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market is 7 percent, and the standard deviation of the market is 20 percent. You are also given the following covariance matrix for Securities J, K, and L. Covariance Security J Security K Security J 0.0012532 0.0010344 Security K 0.0010344 0.0023717 0.0013558 Security L 0.0019711 0.0013558 0.0048442 Also assume that you form a portfolio by putting 40 percent of your funds in Security J, O percent of your funds in Security K, and 60 percent of your funds in Security L. Based on this information, determine the required return of the resulting portfolio, based on the Capital Market Line (CML). O 3.17% O 2.94% O 3.49% O 3.34% Security L 0.0019711 O 3.64%You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Portfolio X Y Z Market Risk-free Rp 14.0% 13.0 .8.5 12.0 7.2 Ор 39.00% 34.00 24.00 29.00 0 Bp 1.50 1.15 0.90 1.00 0 Assume that the correlation of returns on Portfolio Y to returns on the market is 0.90. What percentage of Portfolio Y's return is driven by the market? Note: Enter your answer as a decimal not a percentage. Round your answer to 4 decimal places. R-squaredAssume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.4 14 % 23 % B 1.6 16 14 C 1.8 18 17 a. If σM = 22%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)