Question
In: Finance
CAPM describes the relationship between the expected rates of return on risky assets in terms of...
CAPM describes the relationship between the expected rates of return on risky assets in terms of their systematic risk. Its value depends on what things? And why are these things so important?
Solutions
Expert Solution
CAPM ( Capital Asset Pricing Model) uses the following formula to determine the required rate of return on a stock.
CAPM depends upon the following things:
- Risk Free Rate on Risk Free Assets
- Expected Market return on stock
- Beta which is the correlation of stock return with market returns.
Importance of the components of CAPM:
- Risk Free Rate : This rate compensates the investors for placing money in any investment over a period of time. These rates are generally of T-bills issued by government, which is assumed to be the risk-free and is not affected by market fluctuations.
- Expected market return on stock : The rate is the return of stock in market over a period. This is imortant as it tells how much return is expected when investment is done in stocks.
- Beta: Beta is the risk- measure the volatlity of the stock and the market as well as the correlation between the stock and the market. It is important as investors will be interested in knowing how much risky is the stock to the market, so as they do not experience huge losses, and if they are ready to take the risk of an risky stock, they must be compensated with higher returns.
jeff jeffy answered 2 years agoRelated Solutions
How successful has been the CAPM in explaining return on risky assets and What are the...
How successful has been the CAPM in explaining return on risky
assets and What are the known issues Also Is beta stable?
Consider the following information: • A risky portfolio contains two risky assets. • The expected return...
Consider the following information:
• A risky portfolio contains two risky assets.
• The expected return and standard deviation for the first
risky asset is 18% and 25%, respectively.
• The expected return and standard deviation for the second
risky asset is 18% and 25%, respectively.
• The correlation between the two risky assets is .55.
• The expected on the 10-year Treasury bond is 3%.
Find the optimal complete portfolio. Assume the investor’s
level of risk aversion is 3....
Consider the following information: A risky portfolio contains two risky assets. The expected return and standard...
Consider the following information:
A risky portfolio contains two risky assets.
The expected return and standard deviation for the first risky
asset is 18% and 25%, respectively.
The expected return and standard deviation for the second risky
asset is 18% and 25%, respectively.
The correlation between the two risky assets is .55.
The expected on the 10-year Treasury bond is 3%.
Find the minimum variance portfolio. Make sure to provide the
weights, excepted return, and standard deviation of the portfolio...
Assume that the following market model adequately describes the return generating behavior of risky assets: ...
Assume that the following market model adequately describes the
return generating behavior of risky assets:
Rit=αi+βiRMt+ϵitRit=αi+βiRMt+ϵit
Here:
Rit = The return on the ith asset at Time
t.
RMt = The return on a portfolio containing all risky
assets in some proportion at Time t.
RMt and ϵitϵit are statistically independent.
Short selling (i.e., negative positions) is allowed in the
market. You are given the following information:
Asset
βi
E(Ri )
Var(€i)
A
.65
7.91...
A. CAPM Implications The CAPM implies that I. all investors who invest in risky assets will...
A.
CAPM Implications The CAPM implies that
I. all investors who invest in risky assets will hold the same
portfolio of risky assets.
II. the risk premium of an individual security is a function of the
security's contribution to the risk of the market portfolio.
III. there is one unique market wide price of risk.
IV. all investors hold equal proportions of the risky and the
riskless asset in their complete portfolio.
II and III only
I, II and IV...
Consider a set of risky assets that has the following expected return and standard deviation: Asset...
Consider a set of risky assets that has the following expected
return and standard deviation:
Asset
Expected Return
E(r)
Standard Deviation
1
0.12
0.3
2
0.15
0.5
3
0.21
0.16
4
0.24
0.21
If your utility function is as described in the book/lecture
with a coefficient of risk aversion of 4.0 , then what
is the second-lowest utility you can obtain from an investment in
one (and only one) of these assets? Please calculate utility using
returns expressed in decimal form...
We have only two risky assets in the market with the following risk and return: Expected...
We have only two risky assets in the market with the following
risk and return:
Expected Return
Standard Deviation
Stocks
20%
25%
Bonds
15%
15%
The correlation between the two risky assets is: 0.5 and the
risk free in the market is 8%.
Find the weight of Stocks and Bonds in the optimal portfolio.
Calculate the return and standard deviation of the optimal
portfolio.
Calculate the standard deviation of portfolio (P) with
an expected return of 15% on the CAL....
We have only two risky assets in the market with the following risk and return: Expected...
We have only two risky assets in the market with the following
risk and return:
Expected Return
Standard Deviation
Stocks
20%
25%
Bonds
15%
15%
The correlation between the two risky assets is: 0.5 and the
risk free in the market is 8%.
Find the weight of Stocks and Bonds in the optimal portfolio.
Calculate the return and standard deviation of the optimal
portfolio.
Calculate the standard deviation of portfolio (P) with
an expected return of 15% on the CAL....
Consider the CAPM. The expected return on the market is 10%. Theexpected return on a...
Consider the CAPM. The expected return on the market is 10%. The
expected return on a stock with a beta of 1.7 is 19%. What is the
risk-free rate?
Suppose a fund has a portfolio with two risky assets; stock and bond. Annual expected return...
Suppose a fund has a portfolio with two risky assets; stock and
bond. Annual expected return of stock is 0.15 and standard
deviation of 0.10 and expected return of bond is 0.08 and standard
deviation of 0.07. The correlation-coefficient between stock and
bond is 0.2. while t-bill has annual return of 0.03
Draw the opportunity set with 25% increment in bond fund. Also
indicate the variance minimizing weight for bond and stock
Draw the optimal CAL line and calculate the...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Digital Forensics, At least 200 words for each question 1/ Research a network attack (DDoS, Man-in-the-Middle,...
- Company A Ltd and Company B Ltd are both liquidated after combining to form Company C...
- I want to calculate the max, min, mean, standard deviation and the percentage of data within...
- Describe the electrical changes and movement of ions during the five main phases of membrane polarization...
- a. In your opinion, is "open source" innovation a good idea for technology transfer? b. Are...
- Assume that a simple random sample has been selected and test the given claim. Identify the...
- I would like to see a PowerShell script(for purely inspirational work to use as an inspiration...
ADVERTISEMENT