Reference no: EM132816198
Consider the investment opportunity described below:
Beta Actual Return
Jelly Roll's (JR) 1.70 16.0%
Angel's Unlimited (AU) 1.45 12.7%
Video Viper (VV) 0.85 10.4%
Shoe Lacers (SL) 0.45 5.9%
a) Plot these on Security Market Line given risk free rate rf=4% and market rate of return rm=10%.
b) Which of these investments is overpriced/underpriced/correctly priced? Which have a positive Net Present Value when their cash flows are discounted at the CAPM required rate of return. Explain your reasoning.
c) If inflation goes up by 2% and market risk premium (RPm) remains the same, which security is overpriced/underpriced/correctly priced. Use the data on risk free rate and market's rate of return rm given in the part (a) of this problem.
d) If the risk free rate remains the same (inflation is constant) but recessionary expectation have gone up leading to an increase in market risk premium (RPm) by 1% which security if overpriced/underpriced/correctly priced. Use the data on risk free rate and market's rate of return rm given in the part (a) of this problem. Explain.
e) If you would invest $24,000 in JR, $40,000 in AU, $16,000 in VV, and $20,000 in SL what is your portfolio beta? Compute rate of return expected from your portfolio. Use the data on risk free rate and market's rate of return rm given in the part (a) of this problem. Explain.
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