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Calculate the firm expected return

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Q1. Suppose that a firm's beta is 0.6. The T-bill rate is 6 percent, and the market return is 14 percent. Calculate the firm's fair expected return based on the CAPM model!

a. 20 percent

b. 10.8 percent

c. 14.4 percent

Q2. Which of the following is INCORRECT regarding the CAPM, Index Model, and Real World?

a. CAPM is an example of an untestable theory.

b. The future beta will always be the same as the historical beta.

c. We shall reasonably expect that Google's beta is higher than S&P500 beta.

Q3. Suppose that an analyst uses the two-factor model to calculate an expected return of a firm. A firm has a market beta of 1.2 and a T-bond beta of 0.7. The risk premium of the market index is 6 percent, while that of the T-bond portfolio is 3 percent. The risk-free rate is 4 percent. Calculate the firm's expected return!

a. 13.00%

b. 13.30%

c. 11.80%

Q4. Which of the following is CORRECT regarding the APT?

a. APT applies to any portfolios.

b. APT disagrees with CAPM on the expected return beta relationship.

c. APT solves the unrealistic CAPM's assumptions.

Reference no: EM132967214

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