Question

a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of the ABC stock is $40. According to the CAPM, is the stock over-priced or under-priced? Should he buy the ABC stock? Explain.

Answer #1

a. Suggest an example of an asset with zero beta. Explain
whether an asset with zero beta offers an expected return of zero.
b. Milton considers buying the ABC stock. The ABC stock pays a
constant dividend of $5 in perpetuity, and the beta of the ABC
stock is 1.2. The risk-free rate is 4%, and the expected market
return is 12%.
i. Compute the price of the ABC stock based on the CAPM.
ii. Suppose the market price of...

a. Suggest an example of an asset with zero beta. Explain
whether an asset with zero beta offers an expected return of zero.
b. Milton considers buying the ABC stock. The ABC stock pays a
constant dividend of $5 in perpetuity, and the beta of the ABC
stock is 1.2. The risk-free rate is 4%, and the expected market
return is 12%.
i. Compute the price of the ABC stock based on the CAPM.
ii. Suppose the market price of...

a. Suggest an example of an asset with zero beta. Explain
whether an asset with zero beta offers an expected return of zero.
b. Milton considers buying the ABC stock. The ABC stock pays a
constant dividend of $5 in perpetuity, and the beta of the ABC
stock is 1.2. The risk-free rate is 4%, and the expected market
return is 12%.
i. Compute the price of the ABC stock based on the CAPM.
ii. Suppose the market price of...

Suppose the required rate of return on a stock with Beta 1.2 is
18 per cent and risk free rate is 6 per cent. According to the
CAPM
a) What is the expected rate of return on the market
portfolio?
b) What is the expected rate of return of a zero-beta
security?
c) Suppose you select Stock ABC for Rs. 50 and the stock is
expected to pay a dividend of rs. 2 next year and is expected to
fetch...

A particular asset has a beta of 1.2 and an expected return of
10%. The expected return on the market portfolio is 13% and the
risk-free rate is 5%. The asset is:
Select one:
a. under-priced
b. appropriately priced
c. overpriced
d. There is not enough information to answer the question

Suppose AAPL has a beta of 0.8. If the risk-free rate is 3% and
the market return is 9%, according to CAPM, the expected return for
AAPL is? If the stock price for AAPL is $100 today, according to
the expected return you calculate, what is the expected price for
AAPL in a year if AAPL is not paying dividend? What is the expected
price if AAPL will pay a dividend of $3?

Explain why this statement is true or false: The capital asset
pricing model predicts that security with a beta less than zero
will provide an expected return higher than the market portfolio
return.
Explain why this statement is true or false: According to CAPM,
the price of a security will fall if its expected rate of return
lies above the security market line.

A particular asset has a beta of .90 and an expected return of
10%. Given that the expected return on the market portfolio is 13%
and the risk-free rate is 5%, is the stock appropriately
priced

A particular asset has
a beta of 1.2 and an expected return of 10%. The expected return on
the market portfolio is 13% and the risk-free rate is 5%.
The share is:
--
Hint:
Compare Expected Return to Required Return
A. overpriced
B. underpriced
C. appropriately priced
D. There is not enough information to answer the question.
Previous

The risk-free rate for the next year is 3%, and the market risk
premium is expected to be 6%. The beta of XYZ stock is 1.5. If you
believe that XYZ’s stock will actually return 14% over the next
year, then according to the CAPM you should:
a.
buy the stock because it is under priced.
b.
sell the stock because it is overpriced.
c.
sell the stock because it is under priced.
d.
be indifferent between buying and selling...

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