Question

Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why.

(Hint: Beta of asset i (??)=???????, where ??,?? are standard deviations of asset i and market portfolio, ??? is the correlation between asset i and the market portfolio)

Answer #1

Given that,

Risk free rate Rf = 3%

Market return Rm = 15%

Standard deviation ?? = 20%

Expected return of asset A, Ra = 5%

Standard deviation ?A = 20%

Correlation with market ?AM = 0

Expected return of asset B, Rb = 8%

Standard deviation ?B = 20%

Correlation with market ?BM = 0.5

So, beta of stock A = Correlation with market*standard deviation of asset/standard deviation of market = 0

Beta of stock B = 0.5*20/20 = 0.5

Using beta, stock return can be calculated with CAPM. = Rf + beta*(Rm - Rf)

=> required return on stock A = Rf = 3%

and required return on stock B = 3 + 0.5*(15-3) = 9%

Since required return of stock A is less than its Expected return, so stock is overvalued. and it is drawn above SML line.

For asset B, required return is more than its expected return so this stock is undervalued and it is plotted below SML line.

Given the following data: market rate = 12%, risk-free rate= 3%,
beta of Stock A = 2, beta of stock B= 0.5.
Part 1: Draw the SML and mark the dots for stock A and stock B
on the graph. Hint: note that we only need the risk-free rate and
the market rate to draw the SML. SML is the graph that depicts what
required rates (appropriate rates) should be based on CAPM.
Part 2: Assume that the actual return...

The market index has average return 7% and standard deviation
30%. The
risk-free rate is 3%. A portfolio has beta 1.4, unsystematic
variance of 0.03,
and an M2-measure of -0.01. What is the average return on the
portfolio?

A portfolio invests in a risk-free asset and the market
portfolio has an expected return of 7% and a standard deviation of
10%. Suppose risk-free rate is 5%, and the standard deviation on
the market portfolio is 22%. For simplicity, assume that
correlation between risk-free asset and the market portfolio is
zero and the risk-free asset has a zero standard deviation.
According to the CAPM, which of the following statement is/are
correct?
a. This portfolio has invested roughly 54.55% in...

The value of the S&P500 stock index is 1,000. The risk-free
interest rate is 3% per annum with continuous compounding. The
dividend yield on the S&P 500 is 1%, and the volatility of the
index is 20% per annum. Find the delta on a 6 months put option
with strike price 950. Interpret your result.

5)
A portfolio that combines the risk free asset and the market
portfolio has an expected return of 7% and a standard deviation of
10%. The risk free rate is 4%, and the market returns (expected) is
12%. What expected return would a security earn if it had a
correlation of 0.45 ewth the market portfolio and a standard
deviation of 55%.?
Suppose the risk free rate is 4.8% and the market portfolio has
an expected return of 11.4%. the...

You manage a U.S. core equity portfolio that is sector-neutral
to the S&P500 Index (its industry sector weights approximately
match the S&P 500's). Taking a weighted average of the
projected mean returns on the holdings, you forecast a portfolio
return of 12%. You estimate a standard deviation of annual return
of 22%, which is close to the long-run figure for the S&P 500.
For the year-ahead return on the portfolio, assuming Normality for
portfolio returns, you are asked to do...

The value of the S&P500 stock index is 1,000. The risk-free
interest rate is 3% per annum with continuous compounding. The
dividend yield on the S&P 500 is 1%, and the volatility of the
index is 20% per annum. Find the delta on a 6 months put option
with strike price 950. Interpret your result.
Please write down the formula, the process and the result

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...

Suppose the standard deviation of the market return is 20%. The
risk-free rate is 3%. What is the standard deviation of returns on
a well-diversified portfolio with a beta of 0.9?
a. 22.22%
b. 19.80%
c. 16.20%
d. 18.00%
e. 21.00%

a) Suppose the risk-free rate is 4.4% and the market portfolio
has an expected return of 10.9%. The
market portfolio has variance of 0.0391. Portfolio Z has a
correlation coefficient with the market of 0.31
and a variance of 0.3407. According to the capital asset pricing
model, what is the beta of Portfolio Z?
What is the expected return on Portfolio Z?
b) Suppose Portfolio X has beta of 1 with expected return of 11.5%.
Draw the SML and comment...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 45 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 3 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago