Fin Homework 14 - the systematic risk component measures...

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the systematic risk component measures the contribution of the investment to the risk of the market portfolio. In contrast, the unsystematic risk component is the element of risk that does notcontribute to the risk of the market portfolio. total risk = sustematic + unsystematic risk Ex. If there is a recession there is likely to be a loss in the entire market = systematic.
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the capitol asset pricing model is used to measure risk, or rather the riskiness of a contract. According to CAPM the relavant risk of an investment relates to how the investment contributes to the risk of a market portfolio.
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Depends on if the beta only takes into account systematic risk.
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Expected Rate of Return Using CAPM
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Unformatted text preview: A. Beta 1.2 Risk Free Rate 3.5% Market Portfolio Expected Return 16.0% Market Risk Premium 12.5% ERR 18.500% B. Because we use the market risk premium to calculate the percent Capital Asset Pricing Model Beta 0.765 Expected MKT Return 10.50% Risk Free 3.50% Market Premium 7.00% ERR 15.85500% 8.86% Capital Asset Pricing Model A Stock Beta RRR ERR Premium Rate Risk Free Rate Current Rate K 1.12 9.7800% 9% 6.500% 2.500% 2.50% G 1.3 10.9500% B 0.75 7.3750% U 1.02 9.1300% B Stock Beta ERR Premium Rate Risk Free Rate Current Rate K 1.12 9% 5.000% 4.500% 2.50% G 1.3 10.100% B 0.75 11.000% U 1.02 8.250% 9.600% C Recession -Higher Risk Free Rate Expansion - Higher Premium...
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