Question

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.)**

Answer #1

Step 1:

According to capital asset pricing model equation:

Expected return = Risk free rate + Beta * Market Premium

Substituting the values, we get;

13.2% = 5%+ Beta * 9.2%

13.2% -5% = Beta * 9.2%

8.2% = Beta * 9.2%

=>Beta=8.2%/9.2%=0.891304348

Step 2:

Beta is now doubled to = 0.891304348*2 =1.782608696

Expected return when the value of beta doubles = 5%
+1.782608696*9.2%= 0.214

Current Dividend =54*13.2% = 7.128

New Market Price = Dividend / Expected return if beta doubles

= 7.128 /0.214 = $33.31

**Answer: $33.31**

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 $

Consider a security of which we expect to pay a constant
dividend of $18.49 in perpetuity. Furthermore, its expected rate of
return is 20.1%. Using the equation for present value of a
perpetuity, we know that the price of the security ought to be ,
where D is the constant dividend and k is the expected rate of
return.
Assume that the risk-free rate is 3%, and the market risk
premium is 6.4%.
What will happen to the market price...

Question 1: Answer the
following sums
The market price of a security is $50. Its expected
rate of return is 10%. The risk free rate is 3.5%, and the market
risk premium is 8.2%. What will the market price of the security be
if Beta doubles and all other variables remains unchanged? Assume
the stock is expected to pay a constant dividend in
perpetuity.
2. SABB financial institution composition is as
follows:
Stock
Shares
Price $
Value held
A
250,000...

The market price of a security is Kshs. 40, the security’s
expected rate of return is 13%, the riskless rate of interest is 7%
and the market risk premium, [E(Rm) – Rf], is 8%.
What will be the security’s current price if the its expected
future payoff remain the same but the covariance of it’s rate of
return with the market portfolio doubles?

The risk-free rate of return is 4 percent, and the expected
return on the market is 7.1 percent. Stock A has a beta coefficient
of 1.4, an earnings and dividend growth rate of 6 percent, and a
current dividend of $1.50 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
What should be the market price of the stock?
$
If the current market price of the stock is $45.00, what
should you do?
The...

The risk-free rate of return is 2 percent, and the expected
return on the market is 7.8 percent. Stock A has a beta coefficient
of 1.7, an earnings and dividend growth rate of 7 percent, and a
current dividend of $3.00 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
If the beta coefficient falls to 1.4 and the other variables
remain constant, what will be the value of the stock?
$___________
Explain why the...

eBook
Problem 11-06
The risk-free rate of return is 1 percent, and the expected
return on the market is 9 percent. Stock A has a beta coefficient
of 1.5, an earnings and dividend growth rate of 3 percent, and a
current dividend of $2.80 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
$
The stock -Select-shouldshould notItem 2 be purchased.
$
$
$
The increase in the return on the market
-Select-increasesdecreasesItem 6 the...

1.) According to the CAPM, what is the expected return on a
security given a market risk premium of 9%, a stock beta of 0.57,
and a risk free interest rate of 1%? Put the answers in decimal
place.
2.) Consider the CAPM. The risk-free rate is 2% and
the expected return on the market is 14%. What is the expected
return on a portfolio with a beta of 0.5? (Put answers
in decimal points instead of percentage)
3.) A...

Suppose the risk-free
rate is 4.8 percent and the market portfolio has an expected return
of 11.5 percent. The market portfolio has a variance of .0442.
Portfolio Z has a correlation coefficient with the market
of .34 and a variance of .3345
According to the
capital asset pricing model, what is the expected return on
Portfolio Z? (Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)

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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 17 minutes ago

asked 53 minutes ago

asked 56 minutes ago

asked 1 hour 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 2 hours ago

asked 2 hours ago