The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium

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The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium

is 8.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)

Business

1 answer:

MatroZZZ [7] · Answer 1 · 2023-10-01T12:29:24+03:00

The market price of a security is $50. Its expected rate of return is 14%, and the market price of the security is mathematically given as

MR=27.368

<h3>What will be the market price of the security if its correlation coefficient with the market portfolio doubles?</h3>

Generally, the equation for expected rate return is mathematically given as

RR=(Rf+beta*(Rm-Rf)

Therefore

RR=(Rf+beta*(Rm-Rf)

Beta= (13-7)/8

Beta=0.75

In conclusion, the market price of a security

MR=DPs/RR

Where

Po=DPS/RR'

DPS=40*0.13

DPS=$5.23

and

RR=&+1.5*8

RR=19%

Hence

MR=$5.23/0.19

MR=27.368