Question

Can i have an explanation of why expected rate of return on a security decreases in direct proportion to a decrease in the risk-free rate is false? Is the reason to this false because of the word "direct proportion"?

Answer #1

Security X has an expected rate of return of 13% AND A BETA OF
1.15. The risk-free is 5%, and the market expected rate of return
is 15%. According to the capital asset pricing model, security X is
_______.
a. fairly priced
b. overpriced
c. underpriced
d none of these answers
(I need assistance on how to calculate and conclude.)

As an analyst you have gathered the following information:
Security
Expected Standard Deviation
Beta
Security 1
25%
1.50
Security 2
15%
1.40
Security 3
20%
1.60
(i) If
the expected market risk premium is 6% and the risk-free rate is
3%, what will be the required rate of return on each of the above
securities, and which of the security has the highest required
return?
(ii) With
respect to the capital asset pricing model, if expected return for
Security 2...

Security A has a beta of 1.0 and an expected return of 12%.
Security B has a beta of 0.75 and an expected return of 11%. The
risk-free rate is 6%. Both these two securities are in the same
market. Explain the arbitrage opportunity that exists; explain how
an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell (we assume
that the company-specific risk can be neglected)....

Security A has a beta of 0.99. The market expected rate of
return is 8%, and the risk-free rate is 3%. If the Security A is
observed with an expected return of
8.02%, the alpha of the stock is _________. Present your answer in
% and two decimal places. For example, if the answer is
5.53%, input 5.53.

Which of the following is/are TRUE?
I. The security market line can be thought of as
expressing relationships between expected required rates of return
and beta.
II. A stock with a beta of zero would be expected to have a rate of
return equal to the risk-free rate.
III. Assume that the capital asset pricing model holds. Then, a
security whose expected return falls below the SML (security market
line) indicates that the security is undervalued, whereas a
security whose...

The market price of a security is $60. Its expected rate of
return is 10%. The risk-free rate is 6%, and the market risk
premium is 8%. What will the market price of the security be if its
beta doubles (and all other variables remain unchanged)? Assume the
stock is expected to pay a constant dividend in perpetuity. (Round
your answer to 2 decimal places.) Market price $

Security A has a beta of 1.0 and an expected return of 12%.
Security B has a beta of 0.75 and an expected return of 11%. The
risk-free rate is 6%. Both these two securities are in the same
market. Explain the arbitrage opportunity that exists; explain how
an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell (we assume
that the company-specific risk can be neglected)....

The market price of a security is $54. Its expected rate of
return is 13.2%. The risk-free rate is 5% and the market risk
premium is 9.2%. What will be the market price of the security if
its correlation coefficient with the market portfolio doubles (and
all other variables remain unchanged)? Assume that the stock is
expected to pay a constant dividend in perpetuity. (Do not
round intermediate calculations. Round your answer to 2 decimal
places.)

If security X’s beta is 1.30, the expected return on the market
is 6%, and the risk-free rate is 1%.
What must the expected return on this stock be? (10
points)
b.If the current expected return of security X is 8%, is the
stock price fair, undervalued or overvalued? (10 points)

You must allocate your wealth between two securities. Security 1
offers an expected return of 10% and has a standard deviation of
30%. Security 2 offers an expected return of 15% and has a standard
deviation of 50%. The correlation between the returns on these two
securities is 0.25.
a. Calculate the expected return and standard deviation for each
of the following portfolios, and plot them on a graph:
% Security
1
% Security
2
E(R)
Standard
Deviation
100
0...

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