Question
In: Finance
This week’s 90-day T-bill rate is 2.8%, the average S&P return is 9.8%. Answer the following:...
This week’s 90-day T-bill rate is 2.8%, the average S&P return is 9.8%. Answer the following:
- What is the value of the intercept term and the slope?
- What is the stock’s risk premium?
- What is the market risk premium?
- Write the CAPM equation using the above data.
Solutions
Expert Solution
90-day T-Bill Rate = Risk-Free Rate = Rf = 2.8 % (T-Bill Rate is considered to be risk-free because T-Bills on account of being backed by the full faith and taxing power of the US Federal Government are considered to be default-free)
Average S&P Return = Rm = 9.8 % (S&P is considered to be the broad market as it encompasses an overwhelming majority of stocks available for investment)
The beta of the broader market is 1
Therefore, Required Return Equation using CAPM: R = Rf + Beta x (Rm - Rf) where R is the required return and plots against the y-axis and Beta is the systematic risk plotting against the x-axis.
As is observable, the y-axis intercept is equal to Rf and slope of the line = (R - Rf) / Beta
y-axis Intercept = Rf = 2.8 and slope = (R - 2.8) / Stock's Beta (slope of the stock and not the market). Market Slope = (9.8 - 2.8) / 1 = 7
Stock's Risk Premium = R - Rf = R - 2.8
Market Risk Premium = Rm - Rf = 9.8 -2 .8 = 7 %
CAPM Equation for Stock Return = R = Rf + Stock Beta x (Rm - Rf) =2.8 + Stock Beta x 7
jeff jeffy answered 1 year agoRelated Solutions
Assume that the 90-day Treasury Bill rate of return is 3.5% andthe S&P 500 index...
Assume that the 90-day Treasury Bill rate of return is 3.5% and
the S&P 500 index rate of return is 12%. a) Write the CAPM
equation using the above data. b) What is the intercept and slope
of the above CAPM equation? c) What is the stock’s risk premium
from the above data
Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%...
Suppose that a financial analyst collected the following data:
rate of return on T-bill is 2.5%
Market risk premium is = 5%; company's beta is 0.7;
D1 = $2.00; current stock price is
$30.00; future growth of dividends is 6%.
What estimate should the analyst use?
Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%...
Suppose that a financial analyst collected the following data:
rate of return on T-bill is 2.5%
Market risk premium is = 5%; company's beta is 0.7;
D1 = $2.00; current stock price is
$30.00; future growth of dividends is 6%.
a. What is this firm’s cost of equity using the DCF
approach?
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate
of return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 20% per year. Assume
these values are representative of investors’ expectations for
future performance and that the current T-bill rate is 5%.
Calculate the expected return and variance of portfolios
invested in T-bills and the S&P 500 index with...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 34% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 5%.
Calculate the utility levels of each portfolio for an investor with
A = 3. Assume the utility...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 29% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 4%.
Calculate the utility levels of each portfolio for an investor with
A = 3. Assume the utility...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 37% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 5%.
Calculate the utility levels of each portfolio for an investor
with A = 2. Assume the utility...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 32% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 4%.
Calculate the utility levels of each portfolio for an investor
with A = 3. Assume the...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 24% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 3%.
Calculate the utility levels of each portfolio for an investor
with A = 2. Assume the utility...
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...
Consider historical data showing that the average annual rate of
return on the S&P 500 portfolio over the past 85 years has
averaged roughly 8% more than the Treasury bill return and that the
S&P 500 standard deviation has been about 27% per year. Assume
these values are representative of investors' expectations for
future performance and that the current T-bill rate is 6%.
Calculate the utility levels of each portfolio for an investor
with A = 2. Assume the utility...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 7. A health psychologist knew that corporate executives in general have an average score of 80...
- Submission Guidelines This assignment may be submitted for full credit until Friday, October 4th at 11:59pm....
- Cara Ryder managers a ski school in a large resort and is trying to develop a...
- 1. Like most senses, the neurons that carry that carry the somatic sensations [touch, vibration, two-point...
- Explain how the Court has at times allowed the restriction of the civil rights of minority...
- 1. How do psychoanalytic and behavioral interpretations of childhood experience differ? 2. How does selective attention...
- Procter & Gamble Embraces Continuous Planning and Execution The Procter & Gamble Company (P&G) is an...
ADVERTISEMENT