Calculate \"r\" the required rate of return for each of the following. Assume be

Question

Calculate "r" the required rate of return for each of the following. Assume bets is 1.3 for this and the next two problems, the risk-free rate is 6.5%, and market risk is 10.5%. Show work here. This is the original position. Now assume the risk-free rate increases to 8% because inflation is expected to increase next year. Show work here. What will happen to the slope of the SML because of this? Choices: steeper, flatter, remains constant- Circle your choice Choices: pivots up, pivots down, shifts up, shifts down-Circle your choice Now assume the investors are more averse to risk in the market and require an additional 1%. The risk-free rate is 6.5%. Show work here. What will happen to the slope of the SML because of this? Choices: steeper, flatter, remains constant- Circle your choice Choices: pivots up, pivots down, shifts up, shifts down-Circle your choice Based on what you know about risk, determine which of risk following exposes the investor to more risk. First calculate the coefficient of variation for each. Show work next to each. Which is the riskiest? Explain Company A has an expected rate of return of 12% and a standard deviation of 3%. Company B has an expected rate of return of 8% and a standard deviation of 2%. Company C has an expected rate of return of 20% and a standard deviation of 5%.

Explanation / Answer

Beta=1.3
Rf=6.5%
Rm=10.5%

Required return= Rf+Beta*(Rm-Rf)
=6.5+1.3*(10.5-6.5)=11.7%

Now the Rf=8%

Required return= Rf+Beta*(Rm-Rf)
=8+1.3*(10.5-6.5)=13.2%

The slope remains constant as there is no change in the beta but just chnag in Y-intercept of SML.
The shift is up

2)
Now Rm=11.5% Rf=6.5% beta=1.3

Required return= Rf+Beta*(Rm-Rf)
=6.5+1.3*(11.5-6.5)=13%

The slope will become steeper as there is change in the market risk and the shift is up

3)Coefficent of variation= std/mean
A= 3/12=0.25
B=2/8=0.25
C=5/20=0.25

All have equal risk

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.