Which Financial Asset Should You Buy? You have a large, well-diversified investm
ID: 2768109 • Letter: W
Question
Which Financial Asset Should You Buy? You have a large, well-diversified investment portfolio, and you have some excess cash to invest that would represent a relative small percentage of your total portfolio. You trusted financial advisor has recommended you invest your excess cash on one of the following two financial assets, which we will dub "Asset A" and Asset B". She has provided the following information about them. Asset A is a high-yield bond issued by shale Oil Entrepreneurs, Inc. (SOEI); it has an Expected Return of 15%, a beta of 1.2 and a Market Risk Premium of 7%. Asset B is the common stock of a new, but well-regarded iPhone App developer; it has an Expected Return of 13%, a beta of 1.6 and a Market Risk Premium of 6%. The Risk-Free Rate is 2%. What is the Required Return Of Asset A? What is the Required Return of Asset B? Which Financial Asset should you buy, "Asset A" or "Asset B"? Please be SURE to enter exactly either "Asset A" or "Asset BExplanation / Answer
Answer
Required rate of return of Asset A = Risk free rate + Beta (Market risk premium)
= 2% + 1.2 (7% )
= 2% + 8.4%
Required rate of return of Asset A = 10.4%
Required rate of return of Asset B = Risk free rate + Beta (Market risk premium)
= 2% + 1.6 (6%)
= 2% + 9.6%
Required rate of return of Asset B = 11.6%
Required rate of return of Asset A is 10.4% and expected return of Asset A is 15%. Whereas required rate of return of Asset B is 11.6% and expected return of Asset B is 13%.So, Asset A is providing more expected return compared to Asset B when their respective expected return is compared with their required return. So you should buy Asset A.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.