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# The Capital Asset Pricing Model (CAPM)

### Beta and Expected return

I have a two-part question: I would like help figuring the BETA of my stock that has an expected return of 14%, a risk-free rate of 4% and a market risk premium of 6%. In contrast, If my stock already has an expected return of 11%, a BETA of .85, and a risk-free rate of 5.5%, please help me calculate what the expected ret

### Expected Returns. Consider the following two scenarios for the economy, and the returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.

Problem 11. (Section Four) Expected Returns. Consider the following two scenarios for the economy, and the returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Scenario Market Aggressive Stock A Defensive Stock D Bust -8% -10% -6% B

### Cost of Capital. WACC for Pullman, Bozeman-Western, Fargo, Ewing, Comfort, Rolodex

Please see the attached file for full problem description. ? Complete problems 1, 3, 4, 7, 10, & 12 on text pp. 383-386 of Ch. 12. 1. Calculate the after-tax cost of a \$25 million debt issue that Pullman Manufacturing Corporation (40 percent marginal tax rate) is planning to place privately with a large insurance company

### 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

### Financial Managment: business form, tax, NPV, stock, bonds, ROR, CAPM

Please see the attached file. The primary goal of a publicly owned corporation is to: A) maximize shareholder wealth. B) maximize earnings per share after taxes. C) minimize shareholder risk. D) maximize dividends per share. All of the following business organizat

### 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

### CAPM and the Constant Growth Model for IBM

Please show ALL WORK, INCLUDING FORMULAS AND CALCULATIONS USED 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 A

### 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

### Expected Return, Standard Deviation, CAPM, Beta, CAL ( Capital Allocation Line)

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? 2) Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her r

### Expected return using CAPM

A mutual fund manager expects her portfolio to earn a rate of return of 11 percent this year. The beta of her portfolio is .8. If the rate of return available on risk-free assets is 4 percent and you expect the rate of return on the market portfolio to be 14 percent, should you invest in this mutual fund? Show your work and expl

### 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

### Evaluating the Purchase of an Asset

A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should a. Increase the IRR of the asset to reflect the greater risk. b. Increase the NPV of the asset to reflect the greater risk. c. Re

### 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