Concept explainers
a)
To discuss:
Graph on security market line.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required
b)
To discuss:
Calculation of required rate of return.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
c)
To discuss:
Calculation of the new required rate of return attributed to decreased inflationary expectations.
Introduction:
Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
d)
To discuss:
Calculation of the new required rate of return attributed to increased risk aversion.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.
e)
To discuss:
Impact of the changes on the required rate of return of risky asset.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
- Problem 6-6: Required Rate of Return CAPM Calculate the required rate of return by using CAPM based on the data below. DATA Risk-free rate = 0.04 Market Risk Premium 0.10 %3D Beta = 1.2arrow_forwarduse attachment to answer question This question relates to Diagram 1 from the Quiz 9.4 diagrams, which shows the Security Market Line. What is the expected return on the market? Select one: a. 20% b. 10% c. 15% d. 5%arrow_forwardQ. Market rate of return is 18%, risk-free rate of return 8% and beta is 1.2 1. Calculate the required rate of return 2. Calculate risk premiumarrow_forward
- What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 25% SDA = 18% WA = 0.75 COVA, B = -0.0009 Select one: A. 13.65% B. 20 U ODN 20.0% C. 18.64% D. 22.5% Asset (B) E(R₂) = 15% SDB = 11% WB = 0.25arrow_forwardQuestion 5. You can invest in two risky assets, rị and r, and one risk-free asset, rf . The two risky assets are uncorrelated, and values are E[r] = 8%, E[r2] = 6%, Var[r] = 10%,Var[r2] = 3%, and rf = 3% If you have a mean-variance optimizer with a risk aversion A = 2, what is the optimal portfolio?arrow_forwardConsider the following two securities X and Y. Security Return Standard Deviation X 20.0% Y 10.0% 20.0% 30.0% Risk-free asset 5.0% Beta 1.50 1.0 Which asset (X or Y) in Table 8.3 has the least total risk? Which has the least syst O Y; X. O X; Y. O Y; Y. ○ X; X.arrow_forward
- Consider the following two securities X and Y. Y Security Expected Return Standard Deviation Beta 12.5% 10.0% Risk-free asset 5.0% OA. 1.33 ○ B. 0.88 OC. 1.17 OD. 1.67 20.0% 1.5 30.0% 1.0arrow_forwardQuestion 1Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Question 2 Using the data generated in the previous question (Question 1)a) Plot the Security Market Line b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the grapharrow_forwardTOTAL VS. SYSTEMATIC RISK • Consider the following information: Standard Deviation BetaSecurity C 20% 1.25Security K 30% 0.95 • Which security has more total risk?• Which security has more systematic risk?• Which security should have the higherexpected return?arrow_forward
- Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Question 2Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the grapharrow_forwardWhat is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 10% SDA = 8% WA = 0.25 COVAB = 0.006 Select one: A. 13.75% B. 7.72% C. 12.5% D. 8.79% Asset (B) E(RB) = 15% SDB = 9.5% WB = 0.75arrow_forwardThe beta of the risk-free asset is: 0.5 1.0 -1.0 2.0arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning