Reference no: EM133120798
Problem 1 - Using the capital asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the return on the risk-free share is 1.25% (RF = 1.25%).
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|
Stock
|
Beta
|
|
SKT
|
0.65
|
|
COST
|
0.90
|
|
SU
|
1.42
|
|
AMZN
|
1.57
|
|
V
|
0.94
|
Problem 2 - If the return on the risk-free share is 2.25% (RF = 2.25%) and the market return is 6.50% (Rm = 6.50%), how much is the beta of Bank of America, BAC, if it has had a return of 9.14%?
Problem 3 - Consider the shares of problem 1 with their respective beta coefficients to answer the following questions:
a. Which of the shares represents the most sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this share have if you add it to an investment portfolio in greater proportion than all other assets?
b. Which of the shares represents the least sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have, if you add it to an investment portfolio in greater proportion than all other assets?