Exist in the capital asset pricing model

Assignment Help Financial Management

Reference no: EM131928626

Answer the questions below and show your calculation if the question requires:

1. The risk free rate was 2% and the expected market return is 9%. Inflation of 2% takes place causing you to revise those values. A stock has a beta of 1.50. How id the return increase because of the inflation? a) 2% b) 4% c) 1% d) 1/2 %

2. A major company goes bankrupt causing investors to question whether other companies my go bankrupt. His fear is reflected in the security market line by the security market line: a) Shifting upward and parallel to the pre-fear security market line b) Shifting downward and parallel to the pre-fear security market line c) Rotating counter-clockwise from the pre-fear security market line d) Rotating clockwise from the pre-fear security market line

3. The premium for business risk does not exist in the capital asset pricing model because a) The capm world has no risky stocks b) Investors in the capm world hold very diversified portfolios c) Investors are all risk lovers

4. The return “k” estimated using the CAPM is 15% and the “k” estimated using the dividend model is 18%. The difference in K estimates is a) Error in calculations. They should be the same. b) The extra return because of market risk. c) The extra return because of business risk

Use for next two questions: K1 = D1/Price + g = 15% K2 = Rf + [ (ERm – Rf) x Beta] = 12%

5. You calculate return using the dividend model and get K1. While when you calculate return using the CAPM you get K2. Which is the correct explanation for the difference in values? a) Math error b) The difference in the values of K (15% - 12%) 3% is addition return for market risk c) The difference in the values of K (15% - 12%) 3% is addition return for business risk

6. Logically speaking which is most correct? a. K1 should always be equal to or greater than K2 b. K1 should always be equal to or smaller than K2 c. K1 should always be equal to K2.

Reference no: EM131928626

Questions Cloud

Compute the internal rate of return : The net present value rule versus the internal rate of return rule. You must choose between the two projects whose cash flows are shown below.

What is the market price of your preferred stock : You own 6% preferred stock ($100 par value) and it has a conversion right of 10 shares for each of the preferred shares submitted for conversion.

Unique ability to hedge against systematic liquidity shocks : Commercial banks have a unique ability to hedge against systematic liquidity shocks

What is the bond ytm : A 6% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 6.7277%. What is the bond's price?

Exist in the capital asset pricing model : The premium for business risk does not exist in the capital asset pricing model because

Calculate the expected monthly return : One hundred percent of your money is invested in Stock A. You decide to move half of your money in Stock B, while leaving the reaming half in Stock A.

What is new monthly payment if the couple refinances : What is the new monthly payment if the couple refinances? If a company's bonds are callable:

How does answer relate to the efficient market hypothesis : The news has recently suggested that stock prices are much higher than they should be given future growth estimates.

Under what circumstance is jean strictly liable : Under what circumstance is Jean strictly liable if Kennel bites Mary? Under what circumstance is Jean strictly liable if Louis bites Mary?

User Account

All Pages