Question
(a) Suppose that the expected return on the market portfolio is 18.54%, and the risk-free rate is 4.54%. If the cost-of-capital for a stock is
(a) Suppose that the expected return on the market portfolio is 18.54%, and the risk-free rate is 4.54%. If the cost-of-capital for a stock is 24.84%, find the CAPM beta of the stock.
(b) Suppose that the effective 4-month interest rate is 2.5%, and you are investing $10,000 today. Approximately, how many years will it take for your investment to grow to be $50,000?
(c) Can you make arbitrage profit, if the borrowing rate is less than the investing rate? If yes, briefly describe using an example of arbitrage profit, where you borrow and lend $1,000 today for one year with an effective 1-year borrowing rate equal to 10% and an effective 1-year lending rate equal to 14%. Assume that lending has no risk.
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