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# The Capital Asset Pricing Model (CAPM)

### FINANCIAL MANAGEMENT ( RISK AND CAPITAL)

By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at

### CAPM: Required Rate of Return of portfolio

A money manager is holding the following portfolio: Stock Amount Invested Beta 1 \$300,000 0.6 2 300,000 1.0 3 500,000 1.4 4 500,000 1.8 The risk-free rate is 6 percent and the portfolio's required rate of return is 12.5 percent. The manager would like to sell all of her holdings of Stock 1 and use the pro

### Returns and standard deviation of a joint portfolio

10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively. a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A an

### Working capital management model

A company wants to invest excess cash in 1-month, 3-month and 6-month Certificates of Deposit (CDs). The company has expected uses of cash in the next 6 months, and it wants to make sure that the principal and interest from maturing CDs meet the requirements for cash plus a safety margin for each month. For simplicity we assum

### Corporate Finance

How would the cost of capital change if the capital structure changed. If the company needs a split of 25% debt to 75% equity to have an optimal capital structure, would that be optimal. What would happen to the cost of capital if it is not optimal and the firm moves to optimal.

### Finding the expected rate of return

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent.The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds. What expected rate of return would a sec

### Ross chapter 10, Question 10.31 Modified

Ross chapter 10, Question 10.31 Modified 10.31 Suppose the expected return on the market portfolio is 14.7 percent and the risk-free rate is 4.9 percent. Solomon Inc.stock has a beta of 1.3.Assume the capital-asset-pricing model holds. a. What is the expected return on Solomon's stock? b. If the risk-free rate decreases to

### Risk and Capital

This is a 7 part question if you could please follow the numbers when answering the question it will help me to follow along. I am unclear of the assignment and not very good working with excel, if you can please offer an explanation in a word document with a step by step procedure leading to the outcomes, that would be a great

### 4 Questions

Please provide concise answers in 4 to 5 sentences for the following questions. 1) Would you ever use CAPM to make personal investment decisions? 2) What is your personal discount rate or rate of preferences? i.e. how much would you pay for a promise of \$1000 to be received one year from now? Would you discount it by 10%,

### Beta Calculation for IBM, Oracle & Philip Morris

See attachment for problem and additional chapter (for reference). Please, take this problem only if you can take the time to answer every question correctly in Excel spreadsheet . The questions relate to Capital Asset Pricing Exercise, Beta Calculation for IBM, Oracle & Philip Morris, required rate of return & measure of ris

### Capital Markets

What options are available to organizations for raising capital? How do different capital markets affect the cost of capital to an organization?

### 1) if these are the only two investments in her portfolio, what is her portfolio's beta? 2) If the market required rate of return is 14 percent and the risk-free rate is 6 percent, what is the fund's required rate of return? 3) Use a spreadsheet or calculator with a linear regression function to determine stock X's beta coefficient. Plot the security market line. 4) Construct a scatter diagram showing the relationship between returns on stock Y and the market. Use a spreadsheet or a calculator with a linear regression function to estimate beta.

1. An individual has \$35,000 invested in a stock which has a beta of 0.8 and \$40,000 invested in a stock with a beta of 1.4, if these are the only two investments in her portfolio, what is her portfolio's beta? 2. Suppose you are the money manager of a \$4 million investment fund. The fund consists of 4 stocks with the follo

### After tax cost of debt, cost of equity

1. The Heuser Company's currently outstanding 10 percent coupon bonds have a yield to maturity of 12 percent. Heuser believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35 percent, what is Heuser's after tax cost of debt? 2. The earnings, dividends, and stock pr

### Forward price of a a forward contract to buy a 10 -year, zero-coupon bond that will be issued in one year.

You enter into a forward contract to buy a 10 -year, zero-coupon bond that will be issued in one year. The face value of the bond is \$1,000, and the 1 -year and 11 -year spot interest rates are 4 percent per annum and 9 percent per annum, respectively. Both of these interest rates are expressed as effective annual yields (EAYs).

### Risk Management

A. If one of your stocks has a relatively high beta of 1.4 and is currently doing exceedingly well, why would you want a stock in your portfolio with a relatively low beta of 0.7 that has been recently under-performing? By diversifying your investments according to betas, have you entirely removed the potential risk of losses du

### What if funds are blocked

A US manufacturing organization is planning to extend operations into Canada. I am needing help conducting a sensitivity analysis, based on the following "what if" scenarios: 1. What if funds are blocked? How does this affect the parent company? 2. From the perspective of the subsidiary, what if the subsidiary provided th

### Financial Management - 40 Multiple Choice Questions in Finance

1. Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership? a. Corporations generally face fewer regulations. b. Corporations generally face lower taxes. c. Corporations generally find it easier to raise capital. d. Corporations enj

### Portfolio construction: which portfolio to include

If I currently hold the S&P 500, should I add either A or B to my portfolio? Why? RoR Beta SD Portfolio A 12.00% 0.7 12.00% Portfolio B 16.00% 1.4 31.00% T-Bills 5.00% S&P 500 13.00% 18.00% ROR: Rate of return SD: Standard deviation

### SML, Expected Return, Beta

5) The rate on Treasury bills is 4 percent, and the equity risk premium is 10 percent. Use the SML to estimate the return on each of the above stocks. Security Standard deviation Correlation with market A 0.30 0.70 B 0.75 0.30 C 0.45 0.50 D 0.50 0.16 6) Maria has decided to invest \$5,000 in each of the above

### WACC

Summarize the different capital structure concepts addressed by answering the following questions: Why is WACC important to an organization? What impact does WACC have on capital budgeting and structure?

### Finance

Mini Case, a. 1) What sources of capital should be included when you estimate Cox's weighted average cost of capital (WACC)? 2) Should the component costs be figured on a before-tax or an after-tax basis? 3) Should the costs be historical (embedded) coasts or new (marginal) cost? b. What is the market interest rate

### Personal opinion is that security has an expected rate of return

Your personal opinion is that security X has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the CAPM, is this security overpriced, underpriced or fairly priced?

### Capital-asset pricing model : Rate of Return / Security

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset pricing model holds. What expected rate of return would

### Answer to "expected return" question

Suppose the expected return on the market portfolio is 14.7 percent and the risk-free rate it 4.9 percent. Morrow Inc. stock has a beta of 1.3 Assume the capital-asset-pricing model holds. What is the expected return on Morrow's stock? If the risk-free decreases to 4 percent, what is the expected return on Morrow's sto

### Security Market Line, Mean variance criteria, Portfolio return, Portfolio beta, Portfolio standard deviation, Beta of stock, mean-variance criteria, dominance, SML,

1) Consider the following three investments: Security Expected return Standard deviation J 0.12 0.4 K 0.14 0.4 L 0.13 0.5 M 0.12 0.3 Using the mean-variance criteria, identify whether one security dominates or whether there is no dominance for each pssible pair of securities 2) Tor Johnson has identified the f

### Portfolio: Capital-Asset-Pricing Model (CAPM)

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22% and a standard deviation of 5%. The risk-free rate is 4.9% and the expected return on the market portfolio is 19%. Assume the capital-asset-pricing model holds. What expected rate of return would a security earn if it had a 0.6

### An Explanation of the Expected Rate of Return

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds. Question: What expected rate of

### Capital-Asset-Pricing

Suppose you have invested \$50,000 in the following four stocks: Security Amount Invested Beta Stock A \$10,000 0.7 Stock B 15,000 1.2 Stock C 12,000 1.4 Stock D 13,000 1.9 The risk-free rate is 5 percent and the expected return on the market portfolio is 18 percent.

### CAPM and Expected Return..

I need some tips on how to solve the following type of problem. Can you help?? CAPM and Expected Return. Stock A has a beta of .5 and investors expect it to return 5 percent. Stock B has a beta of 1.5 and investors expect it to return 13 percent. Use the CAPM to find the market risk premium and the expected rate of return on

### What is the expected rate of return on the portfolio using CAPM?

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 25 percent and a standard deviation of 4 percent. The risk-free rate is 5 percent, and the expected return on the market portfolio is 20 percent. Assume the capital-asset-pricing model holds. What expected rate of return would a secu