Question

The CAPM is used to price the risk (estimate the expected return) for any asset. Our examples have focused on stocks, but we could also use CAPM to estimate the expected rate of return for bonds. Explain why.

Answer #1

CAPM relies on estimates of beta

Global Corporate Bond Index and Barclay?s Capital U.S. Long Index Corporate Bond van be used instead of S&P 500 to calculate Market return.

Beta can be calculated by Regressing bond returns to index return.

Intercept = Individual Bond Returns

Beta = sensitivity of bond returns to market return

After obtaining beta for individual bonds grouping can be done based on beta ranking (low to high), rating and industry to create portfolio of bonds

The beta ranked portfolios are regressed against the index which was used to calculate the respective beta values.

The result may violate assumptions of homoscedasticity and no-autocorrelation. Advance econometrics models like Generalized least squares can be used to minimize the problem.

The problem using CAPM to calculate bond returns is inability of data.

Using the CAPM, show
that the ratio of the risk premiums on any two stocks is equal to
the ratio of their BETAS.
(Hint: Market Risk
premium = Expected return on Market - Risk Free Rate ; Apply this
concept in this problem to define risk premium on any asset.)
Please explain in detail.

Both Beta in the CAPM and the standard deviation measure the
risk of any asset. Which of these measures best captures the risk
of an asset when we think about the return we expect from that
asset? Explain.

Both Beta in the CAPM and the standard deviation measure the
risk of any asset. Which of these measures best captures the risk
of an asset when we think about the return we expect from that
asset? Please explain.

Assume the CAPM holds. The risk-free rate is 5% and the market
portfolio expected return is 15% with a standard deviation of 20%.
An asset has an expected return of 16% and a beta of 0.8.
a) Is this asset return consistent with the CAPM? If not, what
expected return is consistent with the CAPM?
b) How could an arbitrage profit be made if this asset is
observed?
c) Would such a situation be expected to exist in the longer...

(Capital asset pricing model)
Using the CAPM, estimate the appropriate required rate of
return for the three stocks listed here, given that the risk-free
rate is 6
percent and the expected return for the market is 17
percent.
STOCK
BETA
A
0.75
B
0.94
C
1.31
(Click on the icon located on the top-right corner of the data
table above in order to copy its contents into a
spreadsheet.)
a. Using the CAPM, the required rate of return for stock...

According to the CAPM, the required return of an asset is the
sum of risk-free rate of return and beta times the risk
premium.
True
False

Suppose Asset A has an expected return of 10% and a standard
deviation of 20%. Asset B has an expected return of 16% and a
standard deviation of 40%. If the correlation between A and B is
0.35, what are the expected return and standard deviation for a
portfolio consisting of 30% Asset A and 70% Asset B?
Plot the attainable portfolios for a correlation of 0.35. Now
plot the attainable portfolios for correlations of +1.0 and
−1.0.
Suppose a...

True false:
1. Under the CAPM, investors require a rate of return that is
proportional to the volatility of each asset.
2. The simple average of all equity betas in a market must equal
exactly 1, by construction.
3. All assets and portfolios that plot on the Capital Market
Line have returns that are perfectly positively correlated with the
market portfolio.
4. A firm that operates in rural areas, and is more exposed to
bush fire risk, will have a...

QUESTION 1
Under the CAPM, investors require a rate of return that is
proportional to the volatility of each asset.
True
False
QUESTION 2
The simple average of all equity betas in a market must equal
exactly 1, by construction.
True
False
QUESTION 3
All assets and portfolios that plot on the Capital Market Line
have returns that are perfectly positively correlated with the
market portfolio.
True
False
QUESTION 4
A firm that operates in rural areas, and is more...

The cost of equity using the CAPM approach
1) The current risk-free rate of return (rRFrRF) is 4.67% while
the market risk premium is 5.75%. The Jefferson Company has a beta
of 0.92. Using the capital asset pricing model (CAPM) approach,
Jefferson’s cost of equity is __________ .
The cost of equity using the bond yield plus risk premium
approach
2) The Jackson Company is closely held and, therefore, cannot
generate reliable inputs with which to use the CAPM method...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 13 minutes ago

asked 33 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago