Question
1.) Suppose you are offered two investments with the following expected cash flows: Economic Probability of Outcome for Outcome for ScenarioEconomic ScenarioInvestment 1Investment 2 Boom
1.) Suppose you are offered two investments with the following expected cash flows:
Economic Probability of Outcome for Outcome for
ScenarioEconomic ScenarioInvestment 1Investment 2
Boom 20% $1,000 $1,200
Normal 50% 750 750
Bust 30% 250 117
a. Calculate the expected value of each investment.
b. Calculate the standard deviation for each investment's possible outcomes.
c. Which investment is riskier? Explain.
2.) Capital asset pricing model (CAPM) For each of the states of the economies shown in the following table, use the capital asset pricing model to find the required return.
States Risk-free rate, RF Market return, rm Beta, B
A 6% 22% 2.40
B 3 8 0.50
C 10 15 0.9
D 12 18 1.00
E 5 10 0.70
Use the basic equation for the capital asset pricing model (CAPM) to work each of the following situations.
a. Find the required return for an asset with a beta of 2.2 when the risk-free rate and market return are 5% and 32%, respectively.
b. Find the risk-free rate for a firm with a required return of 23.75% and a beta of 1.25 when the market return is 20%.
c. Find the market return for an asset with a required return of 18% and a beta of 1.2 when the risk-free rate is 8%.
d. Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 3% and 15%, respectively
Answer the following and show your solution!
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