7. Here are data on two companies. The T-bill rate is 4% and the market risk...

Question

Question

business finance

Answer 1

Answer #1

Question a

As per CAPM, Return=Risk free rate+Market risk premium*beta

For $1 Discount store

=4%+6%*1.5=13%

For Everything $5

=4%+6%*1=10%

Question b

A company is over priced if return as per CAPM>forecasted return, and underpiced if return as per CAPM<forecasted return.

For $1 Discount store, return as per CAPM>forecasted return, it is overpriced.

For Everything $5, return as per CAPM<forecasted return, it is under priced.

Answer 2

Similar Homework Help Questions

Here are data on two companies. The T-bill rate is 4% and the market risk premium...

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company Forecast return Standard deviation of returns Beta $1 Discount Store 12% 8% 1.5 Everything $5 11% 10% 1.0 Characterize each company in the above table as underpriced, overpriced, or properly priced. Company $1 Discount Store Everything $5 (Click to select) (Click to select)
Problem 3 The risk-free rate is 2%, the market risk premium is 5%, and the size...

Problem 3 The risk-free rate is 2%, the market risk premium is 5%, and the size factor and value factor return are 2% and 3%. Below table shows the return characteristics of two stocks A and B: Stock Forecasted return (FR) BMKT BSMB BHML 9.60% 0.9 0.8 -0.5 4.80% 0.8 -0.2 0.4 a. [2pts) According to the Fama-French 3-factor model, what would be the fair return for each stock? b. 2pts Characterize each stock as underpriced, overpriced, or properly priced.
Security X has a rate of return of 13% and a beta of 1.15. The risk-free...

Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 10%. According to the capital asset pricing model, security X is 1) fairly priced 2) underpriced 3) overpriced 4) None of the answers are correct Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 10%....

Problem 1 2pts] According to the CAPM, what is the expected return of the stock with...

Problem 1 2pts] According to the CAPM, what is the expected return of the stock with the standard deviation of the returns of 40% and the correlation between its returns and the market returns is -0.12 The market's expected return and standard deviation are 6% and 15%, respectively. The risk-free rate is 30 Problem 2 The risk-free rate is 1% and the market risk premium is 6%. Below table slows the ru characteristics of three stocks A, B, and C:...
Your estimate of the market risk premium is 7%. The risk-free rate of return is 5%,...

Your estimate of the market risk premium is 7%. The risk-free rate of return is 5%, and General Motors has a beta of 1.5. According to the Capital Asset Pricing Model (CAPM), what is its expected return? O A. 14.7% OB. 11.6% O C. 15.5% OD. 13.2%
Your estimate of the market risk premium is 66%. The risk-free rate of return is 22%,...

Your estimate of the market risk premium is 66%. The risk-free rate of return is 22%, and General Motors has a beta of 1.5. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A. 11% B. 10.5% C. 11.6% D. 9.9%

Security X has an expected rate of return of 21% and a beta of 1.85. The...

Security X has an expected rate of return of 21% and a beta of 1.85. The risk-free rate is 3%, and the market expected rate of return is 12%. According to the capital asset pricing model, security X is _________. A. overpriced B. none of these answers C. underpriced D. fairly priced
Security X has an expected rate of return of 13% and a beta of 1.15. The...

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is Multiple Choice 0 fairly priced 0 overpriced 0 underpriced 0 none of these answers
Your estimate of the market risk premium is 5%. The risk-free rate of return is 4%,...

Your estimate of the market risk premium is 5%. The risk-free rate of return is 4%, and General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM), what is its expected return? O A. 12% O B. 9% O c. 11.4% OD. 10.2%

Assume the risk free rate is 6% and the market risk premium is 7.5%. Ragnarok Unlimited Corp. (RUC) has a beta of 4, and...

Assume the risk free rate is 6% and the market risk premium is 7.5%. Ragnarok Unlimited Corp. (RUC) has a beta of 4, and it offers a return of 27% at the moment. Is RUC fairly priced according to the CAPM? Why or why not? If the price is not fair, what does the CAPM say will happen to the price of RUC stock?