Use the SML to determine the required rate of return for the
following securities: Security 1...
Use the SML to determine the required rate of return for the
following securities: Security 1 has a beta of 5, Security 2 has a
beta of 0.5. The risk free rate is 0.025 and the market required
rate of return is 0.1
Suppose that the expected rate of return for Security 1 is 0.13
and the expected rate of return for Security 2 is 0.10. Explain
what happens in this market, if anything.
Suppose that the required rate of return for the market
increases to .12 all other things equal. What is the new required
rates of return for Securities 1 and 2? Why did they not increase
by the same amount?
Use the SML to determine the required rates of return for the
following securities: Security 3 has a beta of 1.78 and Security 4
has a beta of 0.6 The risk free rate of return is 0.015 and the
market required rate of return is 0.08.
Now suppose that the risk free rate in problem 4 increased to
0.025 and the market risk premium remained the same. What are the
required rates of return for Securities 3 and 4. Explain your
results.
Please show work for every step. Thank you
Solutions
Expert Solution
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The Security Market Line (SML) provides the relationship between
risk and required rate of return. Which of the following statements
about the SML is most correct?
A
The relevant risk is portfolio risk, which is measured by
beta.
B
The relevant risk is total risk, which is measured by standard
deviation.
C
The relevant risk is mutual risk, which is measured by
coefficient of variation.
D
The SML is an equation, but it cannot be graphed.
E
The SML is...
Consider a Tbill with a rate of return of 5% and the following
risky securities:
Security A: E(r) = 0.15; Standard deviation= 0.2
Security B: E(r) = 0.10; Standard deviation= 0.15
Security C: E(r) = 0.17; Standard deviation= 0.28
Security D: E(r) = 0.13; Standard deviation= 0.25
If an investor wants to use the risk-free asset and one of the
risky assets to form a complete portfolio, which risky asset should
the investor choose?
Group of answer choices
Security B...
Following are the securities and projections for Mogul
Corp:
Stock A: REQUIRED RATE OF RETURN =
5%
Constant-growth-growth rate of 3% D0= $3.00
Stock B: REQUIRED RATE OF RETURN =
7%
D0= $4.00, growth at 5% per year for 2 years, followed
by 4% forever
Stock C: REQUIRED RATE OF RETURN = 9%
D0= $2.00, growth at 25% for next 4 years, followed by
5% forever
Mogul has a 3.5% Treasury bond, semi-annual interest,
with 4 years left to maturity...
Following are the securities and projections for Mogul
Corp:
Stock A: REQUIRED RATE OF RETURN =
5%
Constant-growth-growth rate of 3% D0= $3.00
Stock B: REQUIRED RATE OF RETURN =
7%
D0= $4.00, growth at 5% per year for 2 years, followed
by 4% forever
Stock C: REQUIRED RATE OF RETURN = 9%
D0= $2.00, growth at 25% for next 4 years, followed by
5% forever
Mogul has a 3.5% Treasury bond, semi-annual interest,
with 4 years left to maturity...
The Security Market Line defines the required rate of
return for a security to be worth buying or holding. The line,
depicted in blue in the graph, is the sum of the risk-free return
(rf in the slider) and a risk premium determined by the
market-risk premium (RPM) multiplied by the security's
beta coefficient for risk. Drag the rf slider below the
graph to change the amount of the risk-free return. These changes
reflect changes in inflation. Drag the RPM...
Explain why using the Security Market Line (SML) to select
securities is inconsistent with a strict application of the Capital
Asset Pricing Model (CAPM).
1. Explain how you would use the Security Market Line (SML) to
discern the breadth of a portfolio’s individual stock winners vs.
losers.
2. Explain how the link between price (P) and intrinsic value
(V) are viewed by proponents of the Efficient Market Hypothesis and
by those who are not proponents.
Would you prefer to own stocks whose risk/return are "below",
"on", or "above" the SML (Securities Market Line). Note: The SML is
a visual representation of the CAPM.
a. On the SML
b. Not enough Information
c. Above the SML
d. Below the SML
Using the properties of the capital market line (CML) and the
security market line (SML), determine which of the following
scenarios are consistent or inconsistent with the CAPM. Explain
your answers. Let A denote arbitrary securities while F and M
represent the riskless asset and the market portfolio
respectively.
a.
Security
E[R]
σ(R)
A
25%
30%
M
15%
30%
b.
Security
E[R]
σ(R)
A
25%
55%
F
5%
0%
M
15%
30%
1. Explain the difference between the required rate of return
and the expected rate of return. If they are different at a
specific point in time, what does it mean?
2. What is the difference between an expected return and a total
holding period return?
3. How does investing in more than one asset reduce risk through
diversification?