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The Capital Asset Pricing Model (CAPM)

Multiple Choice Questions on Derivatives, mergers, multinational finance: value of an option, factors affecting the value of call options, put options, writing call options, interest rate risk, reinvestment rate risk, swap, Treasury bond futures, appropriate discount rate for valuing acquisition, purchasing power parity, pre-merger WACC

1. The value of an option depends on the stock's price, the risk-free rate, and the a. Exercise price. b. Variability of the stock price. c. Option's time to maturity. d. All of the above. e. None of the above. 2. An option which gives the holder the right to sell a stock at a specified price at some time in the futur

Finance: Calculate net profits of options and securities using CAPM

Calculating net profits of options and securities using CAPM. 1. Calculate the net profits of each option under the following assumption. Also indicate if the option is ITM, ATM, or QTM. Strike price of options = $100 Premium of options =$10 a.) Long position of Call option if the stock price is $125 and if the stock

Security Market Line and Capital Asset Pricing Model

See the attached file. Question 1. How are the SML and the CAPM related (Draw the appropriate graphs and explain)? Question 2. A stock's current dividends are $1.50 and its expected to grow at 10 percent annually. Suppose its required rate of return equals 15 percent. The stock's recent market price is $120. What is its i

Calculating Beta and Cost of Equity Capital

Calculate the beta and the cost of equity capital. The following historical data for a proxy firm is similar to the firm evaluated in the final project assignment. Year Market Rate of Return Firm Rate of Return 20X0 25% 15% 20X1 10% 6% 2

Present/future values, valuation models, amortization schedules and more!

Can you help get me started on these questions? I am having a hard time grasping the concept. Thanks! 1. How would you use the present and future value techniques in preparing a financial plan for retirement? How would required rates of return affect your decision? Explain your reasoning. 2. What is a loan amortizatio

20 Investment Multiple Choice Questions: expected return, portfolio weights, systematic risk, unsystematic risk, standard deviation of return, portfolio, diversification, reward-to-risk ratio, security market line, probability range of returns, portfolio beta, expected rate of return on the market

21. The expected return on a security given two unequal states of the economy: e. will equal the overall expected return on the market. c. will always be higher than that based on a single economic state. b. is computed as the geometric average of the returns for each state. d. is affected by the proba

Questions from Case study risk and return: 1. Imagine you are Bill. Compute the expected rate of return and standard deviation of individual stocks and explain to Mary the relationship between risk and return. 2. Mary has no idea what beta means and how it is related to the required return of the stocks. Explain how you would help her understand these concepts.

Questions: 1. Imagine you are Bill. Compute the expected rate of return and standard deviation of individual stocks and explain to Mary the relationship between risk and return. 2. Mary has no idea what beta means and how it is related to the required return of the stocks. Explain how you would help her understand these concep

In the CAPM model, compare standard deviation with expected return Is the following statement True, False, or Ambiguous? Provide a short justification for your answer (you are evaluated on the justification). "In the CAPM model, since investors are compensated for holding risk, two securities with the same standard deviation should have the same expected return."

Is the following statement True, False, or Ambiguous? Provide a short justification for your answer (you are evaluated on the justification). "In the CAPM model, since investors are compensated for holding risk, two securities with the same standard deviation should have the same expected return."

Estimating cost of capital (WACC, IRR)

1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-

Portfolio performance using the Jensen index

I need help getting started with this assignment. The two companies I am using are Daimler Chrysler and Citigroup. A. Calculate your portfolio's performance using the Jensen index. B. Describe the importance of these measures and interpret how your portfolio performed versus the market index. C. Based on these indices di

Financial Management

1. Why is it important to focus on total returns when measuring an investment's performance? 7. Stock A has a beta of 1.5, and stock B has a beta of 1.0. Determine whether each of the statements below is true or false. a. Stock A must have a higher standard deviation than Stock B. b. Stock A has a higher expected return

Managerial Finance

1.Compare the following risk preferences: (a) risk-averse, (b) risk-indifferent, and (c) risk-seeking. Which is most common among financial managers? 2.Explain how the range is used in sensitivity analysis. 3. Explain the meaning of each variable in the capital asset pricing model (CAPM) equation. What is the security mark

Investments: tax free vs taxable; HP on margin; expected return; standard deviation Suppose your tax bracket is 20%. Would you prefer to earn a 8% taxable return or a 6% tax-free return? What is the equivalent taxable yield of the 6% tax-free return? Refer long description for other problems.

1. Suppose your tax bracket is 20%. Would you prefer to earn a 8% taxable return or a 6% tax-free return? What is the equivalent taxable yield of the 6% tax-free return? 2. Suppose that HP is currently selling at $25 per share. You buy 500 shares using $7,500 of your own money and borrowing the remainder of the purchase pr

Break Even, CAPM

See attached file. 1. Diamond, Inc. only sells 1 carat diamond rings for $5,000. The cost of the diamonds is $2,200 per carat. Store rent is $2,000 per month and a commission is paid to the salesperson for each $1,000 ring sold. Fixed salaries amount to $20,000 per month. How many rings must be sold to break-even each m

CAPM, DCF, cost of preferred stock and new common stock: Gao Computing

Please also see file attached. Start with the partial model attached. The stock of Gao Computing sells for $50, and last year's dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock pays a dividend of $3.30 per share, and the new preferred could be sold at a price to

Risk & Return: expected return, standard deviation, portfolio beta

6. Returns on an investment are uncertain. You estimate the likelihood of alternative returns based on the estimated probabilities of possible outcomes: Outcome Return Estimated Probability of Outcome 1 3% .05 2 7% .25 3 10% .40 4 13% .25 5 17% .05 a. Calculate the expected return. b. Calculate the standard d

CAPM, Cost of Capital, Betas

A risk analyst gives alpha systems a CAPM equity beta of 1.38. The risk free rate is 5.5%. 1. prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium: a. 4.5% b. 6.0% c. 7.5% d. 9.0% 2. Other analysts disagree on the beta, with estimate

Expected Return

Please see the attached file. 1 Asset Expected Return Standard Deviation Weight X 15% 22% 0.5 Y 10% 8% 0.4 Z 6% 3% 0.1 What is the expected return on this three -asset portfolio? 6. True or False and Explain You can construct a portfolio with a Beta of .75 by investing .75 of the budget in T-Bills and the r

I have several study question I need help with

1. A stock's dividend is expected to grow at a constant rate of six percent a year. Which of the following statements is most correct? The expected return on the stock is six percent a year. The stock's price one year from now is expected to be six percent higher. The stock's dividend yield is s

CAPM multiple choice

The capital assets pricing model (CAPM) tells us that in an efficient and fair capital market, the expected return on an asset only depends on its: a. Total risk. b. Systematic risk. c. Unsystematic risk. d. No risk. 18. The CAPM shows that the expected return for a particular asset depends on the following factors except

Would you ever use CAPM to make personal investment decisions?

Would you ever use CAPM to make personal investment decisions? Note: the main message of the CAPM is the notion of diversification of investments. At least theoretically investors should only invest in two portfolios: one is the Market Portfolio (such as the S&P500 Index) and the other is a portfolio of short term or money ma

Use a CAPM analysis to choose between Stocks R and S

You have been asked to use a CAPM analysis to choose between Stocks R and S, with your choice being the one whose expected rate of return exceeds its required return by the widest margin. The risk-free rate is 6%, and the required return on an average stock (or "the market") is 10%. Your security analyst tells you that Stock S'

GE stock, Hewlett Packard (HPQ), Georgia Pacific

1. GE stock has a beta of 1.2 and a standard deviation of 18% per year. The market portfolio has an expected return of 11% and a standard deviation of 15% per year. If the risk free rate of return is 3% what is the expected return on GE stock according to the CAPM. 2. Hewlett Packard (HPQ) has a constant rate of growth in divid

Cost of equity capital : explained

The following financial information is available on Fargo Fabrics, Inc.: Current per-share market price = $20.25 Current per-share dividend = $1.12 Current per-share earnings = $2.48 Beta = 0.90 Expected market price premium = 6.4% Risk-free rate (20-year Treasury bonds) = 5.2% Past 10 years earning per share:

Intrinsic value of your stock

I am working on a project and trying to determine the intrinsic value of UPS Stock. After reviewing info, I came up with the following calculation for the intrinsic value of UPS stock; however, the actual stock price today is 70.25. I am not sure why my calculation does not come close to this figure. Also, is there another met

Unique versus Market Risk.

Figure in the attachment shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot. a. Which stock is safest for a diversified investor? b. Which stock is safest for an undiversified investor who puts all her funds in one of