Problem+Set+5

# Problem+Set+5 - d Plot the two securities on SML graph What...

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Problem Set 5: Chapter 9 4. Here are data on two companies. The T-bill rate is 4% and market risk premium is 6%. Company \$1 Discount Store Everything \$5 Forecasted return 12% 11% Standard deviation of return 8% 10% Beta 1.5 1.0 What would be the fair return for each company, according to capital asset pricing model (CAPM)? 5. Characterize each company in the previous problem as underpriced, overpriced, or properly priced. 9. Consider the following table, which gives a security analyst’s expected return on two stocks for two particular market return. Market return Aggressive Stock Defensive Stock 5% -2% 6% 25% 38% 12% a) What are the betas of the two stocks? b) What is the expected rate on return of each stock if the market return is equally likely to be 5% or 15%? c) If the T-bill rate is 6%and the market return is equally likely to be 5% or 25%, draw the SML for this economy?

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Unformatted text preview: d) Plot the two securities on SML graph. What are the alphas of each? e) What hurdle rate should be used by management of the aggressive firm for a project with the risk characteristics of the Defensive firms stock? For problems 10 to 16: if the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently. 10. Portfolio Expected return Beta A 20 1.4 B 25 1.2 11. Portfolio Expected return Standard deviation A 30 35 B 40 25 12. Portfolio Expected return Standard deviation Risk Free 10 0 Market 18 24 A 16 12 13. Portfolio Expected return Standard deviation Risk Free 10 0 Market 18 24 A 20 22 14. Portfolio Expected return Beta Risk Free 10 0 Market 18 1.0 A 16 1.5 15. Portfolio Expected return Beta Risk Free 10 0 Market 18 1.0 A 16 0.9 16. Portfolio Expected return Standard deviation Risk Free 10 0 Market 18 24 A 16 22...
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Problem+Set+5 - d Plot the two securities on SML graph What...

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