Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and

Question:

Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent.

StockBeta

K ..........1.12

G .......... 1.3

B ..........0.75

U ..........1.02

a. Using the CAPM, what rates of return should Grace require for each individual security?

b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4.5 percent and the market risk premium were to be only 5 percent?

c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...