An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 11% and a standard devi
1 answer:
Answer:
A. 0%
Explanation:
The expected rate of return of A = 11%
Expected rate of return of B = 7%
Risk free rate = rfr = 5%
Sdb = 3%
SDa = 18%
Correlation coefficient = 0.50
The formula used to solve for the required answer is in the attachment.
When computed, we have
0.000054-0.000054/0.000036+0.000216
= 0/0.000252
= 0
Therefore the first option is the correct answer
0% should be invested in stock A.
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Answer:
Explanation:
1.
According to the CAPM model
Fair return = Risk-free rate of return + (Beta × Market Premium)
For $1 discount store:
Expected return = 4% +(1.5 × 6%)
Expected return = 0.04 + (1.5 × 0.06)
Expected return = 0.04 + 0.09
Expected return = 0.13
Expected return = 13%
For everything $5
Expected Return = 4% + (1 × 6%)
Expected return = 0.04 + (1 × 0.06)
Expected return = 0.04 + 0.06
Expected return = 0.10
Expected return = 10%
2.
From the above calculation;
For $1 discount store:
Since the expected return is greater than the forecasted return at 12%.
Thus, it is overpriced.
For everything $5
Here, it is obvious from the above calculation that the expected return is lesser than the forecasted return at 11%.
Therefore, it is underpriced.
3) Beta can be defined as the security change that takes place due to market functuations. Thus, Beta manages the systematic risk associated with firms. From the information given, Kaskin Inc. has a more systematic risk(beta) than Quinn Inc. Thus, option A is the most accurate.
4)
To first find the growth rate by using CAPM model.
Required return = Risk free return + (market return - risk free return)
Required return = 0.08 + 1(0.18 - 0.08)
Required return = 18%
Using the formula:
Required return = (next year dividend/current price) + growth rate
18% = (9/100) + g
0.18 = 0.09 g
g = 0.09
Growth rate g = 9%
To determine the price at year 1; we have:
=
= $109.00
Therefore, the investor can earn a profit of $9 after selling the stock for $109 at the end of the year 1.
5.
According to beta
For portfolio A.
Risk premium per unit = (21 - 8)%/1.3
Risk premium per unit = (0.21 - 0.08)/1.3
Risk premium per unit = 0.1
Risk premium per unit = 10%
For portfolio B.
Risk premium per unit = (17 - 8)%/0.7
Risk premium per unit = (0.17 - 0.08)/0.7
Risk premium per unit = 0.1286
Risk premium per unit = 12.86%
From above, it is clear that the risk associated with portfolio B is lesser compared to portfolio A.
Thus; the correct option is b. A; B