In: Finance

Write short note: a) The risk free asset in the real economy

b) Stock's Beta & it's application

c) Rational of Price earning growth calculation

d) Technical analysis in the investment markets

**Answer a)** The risk free asset is a security or
instrument where investor expect return on investment with no
risk.

Risk free asset is referred as US Treasury bond or any other governement bond. It's called risk free asset because it is assumed than governement will not default on its debt obligation to pay the interest and principal. This is very technial in nature as in practical world, every security carries some risk or other, however government bond is still refer as risk free as its a safest security in all available securities in the market.

**Answer b)** Beta = It is a measurement of stock
riskiness or volatility with respect to overall market. A ctock
which has higher beta carries greater risk as compare to overall
market.

Beta coefficient is used to denote the riskiness and volatily.

If beta coefficient is > 1 then stock is more riskier than overall market.

If beta coefficient is < 1 1 then stock is less riskier than overall market.

If beta coefficient is = 1 then stock is carrying same risk than overall market.

Beta can be negative which indicates stock has negative correlation with respect to market. For example, if index has reported postive return for the day then stock would report negative return and vice versa.

**Answer c)** PEG Ratio = It is a ratio used to
indicate whether security is overvalue or undervalue.

It is calculated as dividing current PE ratio by EPS growth for next year.

PEG = (P/E) / EPS Growth

Where P/E = Share Price / EPS

PEG ratio can greater than or lesser than 1

Greater than 1 PEG indicate that the stock is overvalue

and lesse than 1 PEG indicate that the stock is undervalue.

**Answer d )**

Technical Analysis = It is method of analysing stocks by understanding the price, volume, charts, volatility and different technical indicators.

It is based on the belief that, price of stock is everything and all the information available in world about a particular stock is already discounted in the price hence one shall study price behaviour only to know its future movement.

Apart from price, there are other technical indicators are used such as moving averages, RSI, chart patterns etc.

A stock's beta is 5, the market risk premium is 6%, and the
risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
A stock's beta is 1.5, the expected market return is 6%, and
the risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
You have 2 assets to choose from when forming a portfolio: the
market portfolio and a risk-free...

1. A stock has n HPR of 15%. The stock's beta is 0.76. The
risk-free rate is 2% and the market risk premium is
6.98%. Would you buy it or short it? If so, how much
will you gain? Answer as a percent. Show work.
2.
Given the data below, what is the risk premium on the stock?
Beta: 0.89
Market risk premium: 5
Risk-free rate: 1.5%
Answer as a percent. Show work.

7) There are only two securities (A
and B, no risk free asset) in the market. Expected returns and
standard deviations are as follows:
Security
Expected return
standard Deviation
Stock A
25%
20%
Stock B
15%
25%
The correlation between stocks A and B is 0.8. Compute the
expected return and standard deviation of a portfolio that has 0%
of A, 10% of A, 20% of A, etc, until 100% of A. Plot the portfolio
frontier formed by these portfolios...

Asset P has a beta of 1.6. The risk-free rate of return is 4
percent, while the market risk premium is 10. The asset's required
rate of return is ________. Select one: a. 10.0 percent b. 25.0
percent c. 15.0 percent d. 20.0 percent Miller Dental, Inc. is
considering replacing its existing laser checking system, which was
purchased 3 years ago at a cost of $400,000. The laser checking
system can be sold for a lump sum of $200,000. It...

Kollo Enterprises has a beta of 1.80, the real risk-free rate is
1.20%, investors expect a 3.00% future inflation rate, and the
market risk premium is 4.70%. What is Kollo's required rate of
return? Do not round your intermediate calculations.
a. 10.36%
b. 12.66%
c. 7.96%
d. 8.96%
e. 16.96%

Aasir can invest his money in risk-free asset and/or in a
fund F. The risk-free asset provides a guaranteed return of 4%. The
fund F provides expected return of 12% with
volatility of 25%. If Aasir wants to limit his risk to no
more than 20%, what is the highest expected return he can earn? If
Aasir wants an expected return of at least 16%, what is
the
minimum possible volatility of his portfolio?

MT.
1)With a risk-free rate of 4.2% and a market
risk-premium of 8.7%, a stock's expected rate of return is
10.4%. The following year, the market-risk premium decreases by 1%
but the stock's beta and the risk-free rate remain the same. What
will be the expected rate of return on the stock for that year?
Answer as a percent return to the nearest
hundredth of a percent as in xx.xx without entering a percent
symbol. For negative returns include a negative...

Q4
1.With a risk-free rate of 2.4% and a market
risk-premium of 8.6%, a stock's expected rate of return is
10.7%. The following year, the market-risk premium decreases by 1%
but the stock's beta and the risk-free rate remain the same. What
will be the expected rate of return on the stock for that year?
Answer as a percent return to the nearest
hundredth of a percent as in xx.xx without entering a percent
symbol. For negative returns include a negative...

Write a short note on IMPLANTATION

The real short-term risk-free rate is 1.5% and expected to stay
constant. The inflation rate is expected to be 1% this year, 2% for
each of the following 5 years, and 2.5% thereafter. The maturity
risk premium is expected to be 0.0004 * T, where T is the number of
years to maturity.
What is the expected yield on a 1-year Treasury bill?
part 2: What is the expected yield on a 3-year Treasury
note?
part 3: What is the...

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