5.11. The Alumina Corporation has the following simplified balance sheet (based on market values) Assets Liabilities and
Question:
5.11. The Alumina Corporation has the following simplified balance sheet (based on market values) Assets Liabilities and Equity Debt $10 billion $6 billion Common Stock $4 billion
a. The debt of Alumina, being risk-free, earns the risk-free return of 6 percent per year. The equity of Alumina has a mean return of 12 percent per year, a standard deviation of 30 percent per year, and a beta of .9. Compute the mean return, beta, and standard deviation of the assets of Alumina. Hint: View the assets as a portfolio of the debt and equity.
b. If the CAPM holds, what is the mean return of the market portfolio?
c. How does your answer to part a change if the debt is risky, has returns with a mean of 7 percent, has a standard deviation of 10 percent, a beta of .2, and has a correlation of .3 with the return of the common stock of Alumina?
Step by Step Answer:
Financial Markets And Corporate Strategy
ISBN: 9780071157612
2nd Edition
Authors: Mark Grinblatt, Sheridan Titman