HW3_solution - 3. (30’) A) 16.4% = 1.4(3%) + .8x + 6%; x...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 4751 Solution to HW 3 Capital Asset Pricing Model 1. (50’) See lecture notes 2. (20’) A) 1 B) E(R) = 6% + 1.2(12 - 6) = 13.2%. C) 12% < 7% + 1.3(15% - 7%) = 17.40%; therefore, stock is overpriced and should be shorted. D) 0.2(1.4) + 0.8(0.3) = 0.52. E) 17% = [4% + (11% - 4%)]; 13% = (7%); = 1.86 The Security Market Line (SML) is the line that represents the expected return-beta relationship.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3. (30’) A) 16.4% = 1.4(3%) + .8x + 6%; x = 7.75. B) 15% = 6% + bF; B: 8% = 6% + 1.0F; F = 12%; thus, beta of A = 9/12 = 0.75. C) 17% = x% + 1.2(5%) + 0.7(6%); x = 6.8%. D ) 38% = 12% + 2.0(RP1) + 4.0(RP2); B: 12% = 6% + 2.0(RP1) + 0.0(RP2); RP1=3%, RP2=5%...
View Full Document

This note was uploaded on 02/17/2011 for the course ECON 4751 taught by Professor None during the Spring '11 term at Algoma University.

Ask a homework question - tutors are online