Question
In: Finance
Whether using the current government bond yield for the risk free rate is a good suggestion....
Whether using the current government bond yield for the risk free rate is a good suggestion. Discuss why using this is better/worse than using average historical returns?
Solutions
Expert Solution
Current government bond yield for the risk-free rate is not a good suggestion because current government bond yield is factoring into a recession into the economy as there has been a risk of yield curve inversion and there has been a futuristic discounting of recession in the economy so use of risk free rate in order to determine the longer term perspective will not be adequate by using the current interest rate because it will not properly reflect the incoming cycles so it is better to use average historical return as they will be factoring into various economic cycle and then they will be deciding upon the risk free rate so it can be said that the current government bond yield is not a good suggestion for risk free rate.
If we are using the historical average return, then it is providing up with the scope for discounting of the various economic cycles and since investment is not made just for short period of time, this average historical rate of return in order to calculate the risk free rate will be a better reflection of risk free rate at these times when there is high economic volatility, it is better to use the average historical risk free rate.
jeff jeffy answered 1 year agoRelated Solutions
Look up the current risk-free rate (the yield on a 10-year US Treasury bond will work)....
Look up the current risk-free rate (the yield on a 10-year US
Treasury bond will work). Now make an estimate of the market rate
of return (an estimate can be found on Damodaran’s website – look
at the homepage – at the bottom you will see his estimate for the
current equity risk premium). You could also use another source. Be
sure to cite your sources. Also, look up beta for Netflix, Inc.
(NFLX). Report all information that you found...
Suppose that the risk-free interest rate is 10%. A bond with 8% yield is traded at...
Suppose that the risk-free interest rate is 10%. A bond with 8%
yield is traded at a price. The current bond price is $100.
(a) Calculate the theoretical future price for the contract
deliverable in six months.
(b) If the actual future price for this stock is $102, describe
the arbitrage opportunity and calculate the profit that you can
realize.
If the current 1-year risk free rate in US is 6%, the current 1-year risk free...
If the current 1-year risk free rate in US is 6%, the current
1-year risk free rate in Switzerland (currency symbol: CHF) is 9%,
and the current spot rate between USD and CHF is CHF
1.2550/USD.
(1) If interest rate parity holds, what should be the
appropriate one year forward rate?
(2) You find out the actual quote from your bank on the one year
forward contract is CHF 1.2850 /USD, what would be your covered
interest arbitrage profits...
If the current 1-year risk free rate in US is 6%, the current 1-year risk free...
If the current 1-year risk free rate in US is 6%, the current
1-year risk free rate in Switzerland (currency symbol: CHF) is 9%,
and the current spot rate between USD and CHF is CHF
1.2550/USD.
(1) If interest rate parity holds, what should be the
appropriate one year forward rate?
(2) You find out the actual quote from your bank on the one year
forward contract is CHF 1.2850 /USD, what would be your covered
interest arbitrage profits...
Use the following information to draw XYZ's yield curve, using: - Average real risk free rate...
Use the following information to draw XYZ's yield curve,
using:
- Average real risk free rate of return is constant over 30
years at 1%
- Inflation rate over 30 years is expected to be 4% in the first
five years, 2% in year 6-15, and 1% in year 16-30
- DRP is constant at 1.5%
- LP is constant at 0.5%
- MRP derived from MRP=(t-1)*0.1%
Assume that the real risk free rate is constant at 1.5 %. The yield is 2.3%...
Assume that the real risk free rate is constant at 1.5 %. The
yield is 2.3% on 1-year treasury, 3.0% on 2-year treasury, 3.5% on
3-year treasury, and 5.0% on 5-year treasury securities. What is
the expected rate on three year treasury securities, 2 years from
now?
What is the expected rate on 3year treasury securities, 2 years
from now? Show all the work with formula
The market is expected to yield 12% and the risk free rate is 2%. You currently...
The market is expected to yield 12% and the risk free rate is
2%. You currently hold a portfolio with a beta of 0.75 worth
$23,600. You want to invest in another portfolio with a beta of
2.9. How much will you have to invest in the new risky asset so
that the resulting portfolio will have an expected return of
16%?
answer in $ not in percentage
The market is expected to yield 12% and the risk free rate is 2%. You currently...
The market is expected to yield 12% and the risk free rate is
2%. You currently hold a portfolio with a beta of 0.75 worth
$23,600. You want to invest in another portfolio with a beta of
2.9. How much will you have to invest in the new risky asset so
that the resulting portfolio will have an expected return of
16%?
answer in $ not in percentage
The market is expected to yield 12% and the risk free rate is 2%. You currently...
The market is expected to yield 12% and the risk free rate is
2%. You currently hold a portfolio with a beta of 0.75 worth
$43,400. You want to invest additional funds (i.e money will be
added to your holdings) in another portfolio with a beta of 2.9.
How much will you have to invest in the new risky asset so that the
resulting portfolio will have an expected return of 16%?
The market is expected to yield 12% and the risk free rate is 2%. You currently...
The market is expected to yield 12% and the risk free rate is
2%. You currently hold a portfolio with a beta of 0.75 worth
$25,400. You want to invest additional funds (i.e money will be
added to your holdings) in another portfolio with a beta of 2.9.
How much will you have to invest in the new risky asset so that the
resulting portfolio will have an expected return of 16%?
The answer is 10,885.7
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Advanced Time Value of Money Problems (Try to work this question WITHOUT using Excel, get calculation...
- As we discussed in our class the notion of organizational culture, structure and styles of management...
- Find Laplace transform of 50x''+ 100x' + 60x = 0, x'(0)=0, x(0)=0
- A simple random sample from a population with a normal distribution of 100 body temperatures has...
- Anystate Auto Insurance Company took a random sample of 370 insurance claims paid out during a...
- Reflect back on what you learned during the class that call Research and Evidence Base Practice....
- How should marketers go about understanding their customers? What are some of the things they need...
ADVERTISEMENT