HomeworkLib
Question

Suppose that the risk-free interest rate is 4% per year, and the expected return on the...

Suppose that the risk-free interest rate is 4% per year, and the expected return on the market portfolio is 10% per year. The standard deviation of the return on the market portfolio is 24% per year. A consumer products company, ACC Corp, has a standard deviation of return of 45% per year, and a correlation with the market of 0.28

a)   What is ACC’s beta?

b) If the CAPM holds, what is ACC’s required rate of return on equity?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer a.

Beta of ACC = Correlation between ACC and Market * Standard Deviation of ACC / Standard Deviation of Market
Beta of ACC = 0.28 * 0.45 / 0.24
Beta of ACC = 0.525

Answer b.

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 4.00% + 0.525 * (10.00% - 4.00%)
Required Return = 4.00% + 3.15%
Required Return = 7.15%

0 0
Add a comment
Know the answer?
Add Answer to:
Suppose that the risk-free interest rate is 4% per year, and the expected return on the...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Suppose that CAPM holds. Let Rf  denote the risk free rate, E(RM) the expected return of the...

    Suppose that CAPM holds. Let Rf  denote the risk free rate, E(RM) the expected return of the market portfolio, and sigmaMthe standard deviation of the market portfolio. Now consider some portfolio on the capital market line, with expected return E(R) and standard deviation sigma. What is the beta of this portfolio? Select one: 1. E(R)/sigma 2. sigmaM/sigma 3. sigma/sigmaM 4. E(RM)-Rf

  • Assume a risk-free rate of interest of 4%, an expected rate of return on the market...

    Assume a risk-free rate of interest of 4%, an expected rate of return on the market portfolio of 9% and a beta of 1.2 then the traditional domestic CAPM results in a cost of equity of

  • Suppose that the expected return of a stock is 12%, the risk-free rate is 1%, the...

    Suppose that the expected return of a stock is 12%, the risk-free rate is 1%, the expected return of the market portfolio is 7%, and the beta of the stock with respect to the market portfolio is 1.0. What is the difference between the expected return of the stock and expected return that results from the CAPM for such stock (i.e. expected return - expected return from CAPM)? 3.80% 4.40% 5.00% 5.60%

  • Question 6 The risk-free interest rate is 4% and the expected return on the market portfolio...

    Question 6 The risk-free interest rate is 4% and the expected return on the market portfolio is 10%. Scott, a portfolio manager, runs a portfolio that has a beta of 2/3 and an average annual return of 9% per year. Based on the CAPM, what is the abnormal return (i.e. α) of Scott’s portfolio? ______% (Note: if you find out that there’s no abnormal return, then just input 0 as your answer.)

  • has expected of (15 points) Suppose the risk-free rate is 6.3% and the market portfolio return...

    has expected of (15 points) Suppose the risk-free rate is 6.3% and the market portfolio return of 14.8%. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient with the market of 0.45 and a variance of 0.0169. According to CAPM, what is the expected rate of return on portfolio Z? 4" an rate

  • A portfolio that combines the risk-free asset and the market portfolio has an expected return of...

    A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9 percent and a standard deviation of 16 percent. The risk-free rate is 4.1 percent and the expected return on the market portfolio is 11 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .38 correlation with the market portfolio and a standard deviation of 60 percent?

  • Suppose that the risk-free rate is 6 percent and the expected return of the market portfolio...

    Suppose that the risk-free rate is 6 percent and the expected return of the market portfolio is 14 percent, with a standard deviation of 24 percent. The investor wants to create a portfolio with a standard deviation of 20 percent. Calculate the portfolio’s expected return.

  • 4" (15 points) Suppose the risk-free rate is 6.3% and the market portfolio has an expected...

    4" (15 points) Suppose the risk-free rate is 6.3% and the market portfolio has an expected rate of return of 14.8%. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient with the market of 0.45 and a variance of 0.0169. According to CAPM, what is the expected rate of return on portfolio Z?

  • 3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and...

    3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?

  • 3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and...

    3. Expected return and CAPM Suppose the risk-free rate is 4% and the market portfolio and stock j have the following return distributions: Probability in tot Market return -.15 .05 .15 .20 Return for i --30 .00 .20 .50 a. Find the expected market return, Im. b. Find the variance of the market return, c. Find the expected return for stock j, r;. d. Find the covariance of j and the market, Oim. e. What is J's beta?

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT