Chap007 - Chapter 07 - Capital Asset Pricing and Arbitrage...

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Unformatted text preview: Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory 7-1 CHAPTER 07 CAPITAL ASSET PRICING AND ARBITRAGE PRICING THEORY 1. . 2. . 3. . 4. β = 1.5 5. The increase in stock risk has lowered the value of the stock by 31.58%. 6. β = 40.55/10 = 4.055 7. a. . b. . c. : β P = 0.75 8. a. . 00 . 2 20 5 32 2 A = − − = β 70 . 20 5 14 5 . 3 D = − − = β b. : E(r A ) = 17% E(r B ) = 8.75% c. : 0.5 × (20% + 5%) = 12.5% See the following graph. Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory 7-2 E(r) β 8% 12.5% 1.0 2.0 A SML M .7 α D D The equation for the security market line is: E(r) = 8% + β (12.5% – 8%) d. The aggressive stock has a fair expected rate of return of: E(r A ) = 17% the required return for the defensive stock is: E(r D ) = 11.15% α D = = –2.4% The points for each stock are plotted on the graph above. e. 9. . Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory 7-3 10. ....
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Chap007 - Chapter 07 - Capital Asset Pricing and Arbitrage...

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