We learned in CAPM that the Estimated Returns of Stock is the total of Riskless rate of return, plus Beta x Market Risk Premium. In the discussion, the Riskless rate of return is usually the rate of return on short-term Treasury Bills (T- Bills). Is that always the case? Discuss.
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- The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True FalseThe additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stock1. What effect does increasing inflation expectations have on the required returns of investors in common stock? 2. Explain the specific relationship between risk and reward and why this relationship must be true.
- 1. Risk free rate represents: a. The market rate of return b. The rate provided by long term government securities c. Beta d. The rate provided by short term government securities 2. The market risk premium is measured by: a. T-bill rate. b. market return less risk-free rate. c. beta. d. standard deviation. 3. A stock with a beta of one would be expected to have a rate of return equal to a. the market risk premium b. the risk-free rate c. the market rate of return d. zeroi) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.
- When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs. a. true b. falseWhich statement is NOT correct? The distribution of returns does not affect the expected average rate of return. To find the dividend yield, we can subtract the capital gain yield from the total stock return. Average geometric return is a better indicator than the average arithmetic return for the growth. Wider the distribution of return, riskier is the investment. The current risk premium for U.S. Treasury bills is 0%.What does the capital asset pricing model (CAPM) calculate? a. The expected rate of return on an individual stock with respect to the risk-free rate of return b. The expected rate of return of an individual stock based on its overall risk c. The expected rate of return of an individual stock with respect to its market risk only d. The expected rate of return of an individual stock reflecting its financial risk Clear my choice
- In a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free rateYou are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Stock Rit Rmt ai Beta C 12 10 0 0.8 E 10 8 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t What is the abnormal rate of return for Stock C during period t using only the aggregate market return (ignore differential systematic risk)?
