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# The Capital Asset Pricing Model (CAPM)

### "Risk Management" Beta and Risk

1) 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

### Maximizing Shareholder Wealth - EMH, CAPM, SML

How do the efficient markets hypothesis, the capital asset pricing model, and the security market line maximize shareholder wealth?

### Capital Asset Pricing Model (CAPM): expected return on Kellogg common equity

1. Use the Capital Asset Pricing Model (CAPM) to find the expected return on Kellogg common equity. Use monthly price data for the last ten years (ending June 2004). The following steps will guide you through this problem. A. Using the FRED database, (http://research.stlouisfed.org/fred2/) calculate the average return on 10-y

### A. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings using the CAPM method. c. What is the cost of new common stock, based on CAPM? (Hint: Find the difference between Ke and Ks as determined by the DCF method, and add that differential to the CAPM value for Ks.) d. If Skye Computer continues to use the same capital structure, what is the firm's WACC assuming (1) that it uses only retained earnings for equity and (2) that it expands so rapidly that it must issue new common stock?

Here is the condensed balance sheet for Skye Computer Company (in thousands of dollars: Current Assets \$2000 Net Fixed Assets \$3,000 Total Assets \$5,000 Current Liabilities \$900 Long-Term Debt \$1,200 Preferred Stock \$250 Common Stock \$1,300 Retained Earnings \$1,350 Total Common Equity \$

### What will be the new stock price

Ceejay Corporation's stock is currently selling at an equilibrium price of \$30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, Eo, were \$4.00 and the dividend payout ratio is 40%. The risk-free rate is 8%, and the market risk premium is 5%. If the market risk (beta) incre

### Calculate the following asset activity ratios for the end of 1999. 1. Average Collection Period , 2. Inventory Turnover 3. Total Asset Turnover . After you calculate the ratios, please tell me which ratio is the most important or critical to monitor as regards to ABC Fitness, Please explain why.

ABC Fitness Company 000's INCOME STATEMENT Dec. 99 Sales 1968.016 Cost of Goods Sold 1466.733 Gross Profit 501.283 Selling and Ad. Expenses 361.402 Depreciation 35.7 Operating Income (EBIT) 104.181 Interest Expense 34.482 Other Expense 14.124 EBT 83.823 Taxes 24.701 Net Income 59.122 BALANCE SHEET 000's Assets C

### Calculate the Required Return of the Bank Ltd. and Trade Ltd. Calculate the beta for this company. What is required return? Calculate the portfolio's standard deviation? How can you obtain 17 percent portfolio return by investing exclusively in Trade Ltd? What would be the percentage change in the return on the stock, if the return on an average stock increased by 40 percent while the risk-free rate remained unchanged?

1. The shares of the following three companies have been included in the portfolio: Required Return in Accordance with Systematic Risk Standard Deviation of Returns Beta Bank Ltd. ? 20 1.2 Trade Ltd. ? 30 0.8 ALD Ltd. ? 25 ? Market Portfolio 12 16 ? Risk free 5 0 - a) Calculate the Required Return of the Bank Ltd. an

### 2-stage Dividend Discount Model is shown.

Using 2-stage DDM and CAPM to value stocks: Beta of company: 1.15 Market price: \$30 Intrinsic value: ? Risk-free rate 4.50% Expected market return: 14.5% EPS and dividend growth rates for first 3 years: 12% per year EPS and dividend growth rates thereafter: 9% per year Estimate the intrinsic value oif the compa

### Stock Valuation Methods

Questions: 1.- How should Jonathan describe the rationale of the dividend discount model (DDM) and demonstrate its use in calculating the justifiable price of common stock? 2.- Being a researcher, Dwayne asked Jonathan a key question, "How did you estimate the growth rates used in applying the model?" Using the data givi

### APT and CAPM, Arbitrage portfolio , Factor sensitivity

1) In what significant does the APT differ from CAPM ? 2) Why would an investor wish to form an arbitrage portfolio ? 3) What three conditions define an arbitrage portfolio ? 4. Assuming a one-factor model, consider a portfolio composed of three securities with the following factor sensitivities: Security ---

### Expected Return, Beta, Standard Deviation and Non-Market Risk

On the basis of the risk and return relationships of the CAPM, supply values of the seven missing numbers in the following table: Security Expected return Beta Standard Deviation Non-market Risk A ____% 0.8 ____% 81 B 19.0

### Risk and return for purchase of risky asset

If the required risk-free rate of return is estimated to be 4% and the expected rate of return on the market is 9%, what is the required rate of return on any risky asset held in a diversified portfolio when the asset's beta coefficient is 0.85?

### Describe the usage of the HAMADA model

Describe the implementation of the HAMADA model.

### 12 Multiple choice questions on portfolio of stocks, beta of stocks, beta of portfolio, CAPM, market rate, market risk premium , diversified portfolio , market risk , Security Market Line, unsystematic risk, default-free rate, expected inflation rate, etc.

1 In a portfolio of three different stocks, which of the following could not be true? a. The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isola-tion. b. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks. c. The beta of the portfolio

### Determining the CAPM: what is the Risk-free rate

A stock has an expected return of 20% and a beta of 1.5, and the expected return on the market is 15%. What must the risk-free rate be?

### Figuring the CAPM: What must the expected return be?

A stock has an expected return of 10%, its beta is 0.9, and the risk-free rate is 5%. What must the expected return on the market be?

### Analysis CAPM model, Beta and Expected Return on Shares

What would you expect the effect to be of the following changes on the market price of a company's shares, all other things being the same? Provide an explanation of your expectation. a. Investors demand a higher required rate of return on shares in general b. The covariance between the company's rate of return and that for