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The Capital Asset Pricing Model (CAPM)

Important information about Beta and Required Return

The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here. State of the Market Probability that state Occurs Stock Market Chicago Gear Stagnant 0.20 -10% -15% 9.75% 15.00% Slow growth 0.35 10% 15% Average growth 0.30 15% 25% Rapid growth 0

1) Which security (A or B) has the least total risk? __________________ 2) Which security (A or B) has the least systematic risk? __________________ 3) Which security (A or B) has the greatest diversifiable risk? ____________________ 4) What is the portfolio beta if you invest 35% in A, 45% in B and 20% in the risk-free asset?

Problem 2 (Chapter 13) Please use the following information to answer the following questions. The return on the risk-free asset is 4% and the return on the market is 14%. Security Standard Deviation Beta A 20% 1.2 B 25% 0.8 1) Which security (A or B) has the least total risk? __________________ 2) Which securit

Calculate the Expected Returns - Chicago Gear Stock

C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here. a. Calculate the expected returns on the stock market and on Chicago Gear stock. b. What is Chicago Gear's beta? c. What is Chicago Gear's required return according to the CAPM? REALIZED RET

Beta in the CAPM

What does this low beta do in the CAPM, compared to a stock with a beta of 1.1?

CAPM

7. Using the CAPM to calculate the cost of capital for a risky project assumes that: A. using the firm's beta is the same measure of risk as the project. B. the firm is all-equity financed. C. the financial risk is equal to business risk. D. Both A and B. E. Both A and C.

Nikita Inc tradition of financing operations with equity issues

See attached file. Nikita Inc has a tradition of financing all their operations with equity issues. They have no debt in their capital structure. The market return on their equity is currently 14%, slightly below the return on the stock market as a whole, which is 15%. The risk free rate of interest is currently 5%. The share

Finance for business practice problems

Please see the attached and answer the practice problems. 1. Consider the following equally likely project outcomes: Profit X Y Pessimistic prediction $ 0 $500 Expected outcome $ 500 $500 Optimistic prediction $1000 $500 a

Info Financial Management

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

Cost of Equity Problem

Please help with this capital asset pricing model problem. How would one determine the cost of equity?

Value of Human Capital

I believe expenditures on human capital should be an expense not an asset. The reason I believe this is because assets usually depreciate and human capital only gets better over time, not worse. Please can you tell me why as expenditures on human capital should be an asset? Explain why.

G&G exchanged an old asset plus cash for a new asset.

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? A. The old asset's FMV is $150,000 B. If the exchange is nontaxable, G&G's recognized gain is -0- C. If the exchange is nontaxable, G&G's tax basis in

CAPM: what is risk premium, required return, beta

The Treasury bill rate is 4 percent, and the expected return on the market portfolio is 12 percent. Using the capital asset pricing model: a) What is the risk premium on the market? b) What is the required return on an investment with a beta of 1.5? c) If an investment with a beta of 8. offers an expected return of 9.8

Investments: test question about Richard Roll's critique to CAPM

In his critique of the CAPM, Richard Roll (1977) argued that the CAPM a) is not testeable because the true market portfolio can never be observed b) is of limited use because systematic risk can never be enterely eliminated c) should be replaced by the APT d) all of the above

Draw the Security market line (SML) and risk premium; required returns for assets

Assume that the risk-free rate, is currently 9% and that the market return is currently 13%. a. Draw the security market line(SML) on a set of "nondiversifiable risk (x-axis) required return (y-axis)" axes. b. Calculate and label the market risk premium on the axis in part a. c. Given the previous data, calculate the requir

CAPM and Hurdle Rates

A project under consideration has an internal rate of return of 14 percent and a beta of .6. The risk-free rate is 4 percent, and the expected rate of return on the market portfolio is 14 percent. Should the project be accepted? Should the project be accepted if its beta is 1.6? Why does the answer change?

If the interest rate on Treasury bills is 5 percent and the expected return on the market portfolio is 15 percent, what is the expected return on the shares of the law firm according to the CAPM?

CAPM. We do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, -.2. a. If the interest rate on Treasury bills is 5 percent and the expected return on the market portfolio is 15 percent

Finance and importance to business

Discuss how financial statements, cash flow, the risk, return, and the capital asset pricing model, stocks, stock valuation and stock market equilibrium are important to one's work profession and business?

What is the new price of the bonds, given that they now have 19 years to maturity? What is the bond's annual coupon interest rate? Which of the following lists correctly ranks investments from highest to lowest returns and risk? What is the required rate of return on the stock market?

Can you help me get started with this assignment? 11. Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? a) $1,046.59

A. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owning ABC. b. How does the ABCs historical return compare with the return you believe to be a fair return, given the organizations systematic risk.

See the table below for computing the average returns and the standard deviation for ABC Corp and the market. Month ABC Corp Market 1 6% 4% 2 3 2 3 -1 1 4 -3 -2 5 5 2 6 0 2 a. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owni

Valuation of stock using CAPM

A share of stock with a beta of .75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4 percent, and the market risk premium is 7 percent. If the stock is perceived to be fairly priced today, what must be investors' expectation of the price of the stock at the end of the year?

Essentials of Investments: SML, CAPM, Beta, expected rate of return

Please see attachment Textbook: Essentials of Investments Chapter 7 (1, 2, 3, 6, 16, 18, and 32) 1. Which of the following statements about the security market line (SML) are true? a. The SML provides a benchmark for evaluating expected investment performance. b. The SML leads all investors to invest in the same

Cost of common equity explained in this solution

6. The earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto's common stock sells for $23 per share, its last dividend was $2.00, and it will pay a dividend of $2.14 at the end of the current year. Using the DCF approach, what is the cost o

Finding Beta of the stock

A stock has a required return of 11%, the risk free rate is 7% and the market risk premium is 4%. What is the stock's beta?

Priniciples of Finance: Discuss the Capital Asset Pricing Model (CAPM)

Please research Capital Asset Pricing Model (CAPM), and would you ever use it to make personal investment decisions? Consider the following: WHAT IS THE MAIN MESSAGE OF THE CAPM? IT EVOLVES FROM THE NOTION THAT INVESTORS IN GENERAL AREN'T STUPID: THEY DIVERSIFY THEIR INVESTMENT FUNDS INTO A WELL DIVERSIFIED PORTFOLIO. THER