Question 13.S-TP.4: CAPM Suppose the risk-free rate is 8 percent. The expected r...

Fundamentals of Corporate Finance

CAPM Suppose the risk-free rate is 8 percent. The expected return on the market is 16 percent. If a particular stock has a beta of .7, what is its expected return based on the CAPM? If another stock has an expected return of 24 percent, what must its beta be?

The "Step-by-Step Explanation" refers to a detailed and sequential breakdown of the solution or reasoning behind the answer. This comprehensive explanation walks through each step of the answer, offering you clarity and understanding.
Our explanations are based on the best information we have, but they may not always be right or fit every situation.

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

This Question has been Answered.

Already have an account?

Related Answered Questions

Question: 13.2

Going back to Example 13.1, what are the variances on the two stocks once we have unequal probabilities? The standard deviations? ...

Verified Answer:

We can summarize the needed calculations as follow...

Question: 13.4

In Example 13.3, what are the standard deviations on the two portfolios? ...

Verified Answer:

To answer, we first have to calculate the portfoli...

Question: 13.6

Suppose we had the following investments: What is the expected return on this portfolio? What is the beta of this portfolio? Does this portfolio have more or less systematic risk than an average asset? ...

Verified Answer:

To answer, we first have to calculate the portfoli...

Question: 13.3

Suppose we have the following projections for three stocks: We want to calculate portfolio expected returns in two cases. First, what would be the expected return on a portfolio with equal amounts invested in each of the three stocks? Second, what would be the expected return if half of the ...

Verified Answer:

Based on what we’ve learned from our earlier discu...

Question: 13.1

Look again at Tables 13.1 and 13.2. Suppose you think a boom will occur only 20 percent of the time instead of 50 percent. What are the expected returns on Stocks U and L in this case? If the risk-free rate is 10 percent, what are the risk premiums? ...

Verified Answer:

The first thing to notice is that a recession must...

Question: 13.8

Suppose the risk-free rate is 4 percent, the market risk premium is 8.6 percent, and a particular stock has a beta of 1.3. Based on the CAPM, what is the expected return on this stock? What would the expected return be if the beta were to double? ...

Verified Answer:

With a beta of 1.3, the risk premium for the stock...

Question: 13.7

An asset is said to be overvalued if its price is too high given its expected return and risk. Suppose you observe the following situation: The risk-free rate is currently 6 percent. Is one of the two securities overvalued relative to the other? ...

Verified Answer:

To answer, we compute the reward-to-risk ratio for...

Question: 13.5

Consider the following information about two securities. Which has greater total risk? Which has greater systematic risk? Greater unsystematic risk? Which asset will have a higher risk premium? ...

Verified Answer:

From our discussion in this section, Security A ha...

Question: 13.S-TP.3

Risk and Return Suppose you observe the following situation: If the risk-free rate is 7 percent, are these securities correctly priced? What would the risk-free rate have to be if they are correctly priced? ...

Verified Answer:

If we compute the reward-to-risk ratios, we get (....

Question: 13.S-TP.2

Portfolio Risk and Return Using the information in the previous problem, suppose you have $20,000 total. If you put $15,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation of your portfolio? ...

Verified Answer:

The portfolio weights are $15,000/$20,000 = .75 an...