In: Finance

# This question relates to Topic 4 and LO’s 1, 2, 3, 5, 6 a. In terms...

This question relates to Topic 4 and LO’s 1, 2, 3, 5, 6
a. In terms of share investment define what beta (β) represents. [2.5 marks]
b. According to au.finance.yahoo.com, APT has a beta of 1.88. What does this mean? [2.5
marks]
c. In terms of riskiness how would you compare APT’s beta to the market? [2.5 marks]
d. Calculate the expected returns for APT using the Capital Asset Pricing Model (CAPM)
and the following yields. [5 marks]
• The risk free rate (Rf) as measured by the yield on Australian 10 year treasury
bonds is 1.5% p.a.
• The average return on the market for the past 10 years has been 10.5% p.a.
• Use the APT beta (β) of 1.88.
e. i. Using the CAPM data from (d), create an Excel scatter plot graph to plot the Security
Market Line (SML)using the Rf, return on the market and APT. [5 marks]
ii. Based on your CAPM findings, construct a portfolio made up of 40% market and 60%
APT. Calculate the estimated return and beta for this portfolio. [2.5 marks

## Solutions

##### Expert Solution

a.) Beta represents the volatility of a stock return relative to the returns of the entire market. The Beta is a critical component of the Capital Asset pricing model, which models the required rate of return on a stock given the risk factor (Beta) of that stock. A company with a higher Beta has greater risks and hence greater required returns

b) A beta of >1 indicates that the stock is more volatile than the average market returns. Accordingly, the stock demands a higher return in order to compensate for the excess risks taken.

c) Market returns have a beta of 1. A beta of 1.88 implies that APT returns should be 88% more than the market returns, while at the same time, riskier than the market returns.

d) According to the CAPM equation, the required rate of return on APT is given by

where is the risk-free rate = 1.5%

is the average market return = 10.5%

= 1.88

= 0.015+ 1.88*(0.105-0.015)

=18.42%

e) i.

 R(m) 10.50% R(f) 1.50%
 Beta E(APT) 0.05 1.95% 0.1 2.40% 0.15 2.85% 0.2 3.30% 0.25 3.75% 0.3 4.20% 0.35 4.65% 0.4 5.10% 0.45 5.55% 0.5 6.00% 0.55 6.45% 0.6 6.90% 0.65 7.35% 0.7 7.80% 0.75 8.25% 0.8 8.70% 0.85 9.15% 0.9 9.60% 0.95 10.05% 1 10.50% 1.05 10.95% 1.1 11.40% 1.15 11.85% 1.2 12.30% 1.25 12.75% 1.3 13.20% 1.35 13.65% 1.4 14.10% 1.45 14.55% 1.5 15.00% 1.55 15.45% 1.6 15.90% 1.65 16.35% 1.7 16.80% 1.75 17.25% 1.8 17.70% 1.85 18.15% 1.9 18.60% 1.95 19.05% 2 19.50% 2.05 19.95% 2.1 20.40% 2.15 20.85% 2.2 21.30% 2.25 21.75% 2.3 22.20% 2.35 22.65% 2.4 23.10% 2.45 23.55% 2.5 24.00%

e) ii.

The expected return on the portfolio is

w(APT)= 0.6

w(m)=0.4

E(APT) = 0.1842

E(M) = 0.105

= 0.6*0.1842 + 0.4*0.105 = 15.25%

From the CAPM equation, Beta of the portfolio is given by

= (0.1525-0.015) / (0.105-0.015) = 1.53

## Related Solutions

##### ID X Y 1 2 3 2 3 6 3 4 6 4 5 7 5...
ID X Y 1 2 3 2 3 6 3 4 6 4 5 7 5 8 7 6 5 7 7 6 7 8 8 8 9 7 8 10 12 11 Test the significance of the correlation coefficient. Then use math test scores (X) to predict physics test scores (Y).  Do the following: Create a scatterplot of X and Y. Write the regression equation and interpret the regression coefficients (i.e., intercept and slope). Predict the physics score for each....
##### [4 5 5 2 4 4 6 3 3 7 5 3 6 3 4 4...
[4 5 5 2 4 4 6 3 3 7 5 3 6 3 4 4 6 5 4 5 3 7 5 5 4 2 6 5 6 6] This is my dataset Find mean, median, mode, variance, standard deviation, coefficient of variation, range, 70th percentile, 3rdquartile of the data and skewness and define what each of these statistics measure. For example, mean is a measure of the central tendency, what about the rest? Use Chebyshev’s rule to find...
##### [4 5 5 2 4 4 6 3 3 7 5 3 6 3 4 4...
[4 5 5 2 4 4 6 3 3 7 5 3 6 3 4 4 6 5 4 5 3 7 5 5 4 2 6 5 6 6] This is my dataset Split the dataset in two equal parts. You have 30 datavalues. If you split the data in two equal parts each part will contain 15 data values.  Call the first part Y and second part X.Draw scatter plot of the 2 datasets, X being on the horizontal...
##### tens Units 1 5 2 3 4 8 5 2 5 6 9 6 1 3...
tens Units 1 5 2 3 4 8 5 2 5 6 9 6 1 3 5 4 7 9 7 0 0 4 5 6 9 9 8 1 3 5 6 8 9 9 0 1 2 3 5 9 The table represent a random sample of 31 test scores taken from a large lecture class. Find the following [round to 2 decimal points X. XX] a) [2 pts] Find the 5 number summary [L, Q1, Q2, Q3,...
##### X 1 3 5 3 4 4 Y 2 5 4 3 4 6 A: Plot...
X 1 3 5 3 4 4 Y 2 5 4 3 4 6 A: Plot the date B: find the line of best fit C: determine ŷ AT x=3 D: Find r and r^2 E: explain r and r^2
##### 2. Consider functions f : {1, 2, 3, 4, 5, 6} → {1, 2, 3, 4,...
2. Consider functions f : {1, 2, 3, 4, 5, 6} → {1, 2, 3, 4, 5, 6, 7, 8, 9, 10}. (a) How many of these functions are strictly increasing (i.e. f(1) < f(2) < f(3) < f(4) < f(5) < f(6))? Hint: How many different possibilities are there for the range of f? For each range of f, how many strictly increasing functions are there? (b) How many of these functions are non-decreasing (i.e. f(1) ≤ f(2) ≤...
##### Question 1 (of 11)Question 2 (of 11)Question 3 (of 11)Question 4 (of 11)Questions 5 - 6...
Question 1 (of 11)Question 2 (of 11)Question 3 (of 11)Question 4 (of 11)Questions 5 - 6 (of 11)Questions 7 - 9 (of 11)Questions 10 - 11 (of 11)  Save & ExitSubmit   Time remaining: 0:51:30   Problem 7-5A Determine depreciation under three methods (LO7-4) [The following information applies to the questions displayed below.] University Car Wash built a deluxe car wash across the street from campus. The new machines cost \$270,000 including installation. The company estimates that the equipment will have a residual...
##### Define the following terms: 1.      Philosophy 2.      Metaphysics 3.      Epistemology 4.      Logic 5.      Ethics 6. &nbsp
Define the following terms: 1.      Philosophy 2.      Metaphysics 3.      Epistemology 4.      Logic 5.      Ethics 6.      Political Philosophy 7.      Argument 8.      Fallacy 9.      Socratic Method 10.   Platonic forms 11.   Aristotle’s Prime Mover 12.   Key assumption of the modern period 13.   Dualism 14.   Materialism 15.   Idealism
##### exampleInput.txt 1 2 3 0 2 3 4 0 1 3 5 0 1 2 6...
exampleInput.txt 1 2 3 0 2 3 4 0 1 3 5 0 1 2 6 1 5 6 8 2 4 6 7 3 4 5 9 10 5 8 9 4 7 9 6 7 8 6 How can I detect when 'cin' starts reading from a new line. The amount of numbers in each row is unknown. I need them in type 'int' to use the data.
##### 2. Consider the following data: x= 1, 2, 3, 4, 5 y =3, 2, 4, 6,...
2. Consider the following data: x= 1, 2, 3, 4, 5 y =3, 2, 4, 6, 5 By hand, not using Matlab, and showing your work: (a) Compute the correlation coefficient. (b) Find the least-squares line. (c) Find the standard deviation around the least-squares line.