a) Your client is considering investing his money in one of two securities but is unsure about the risk he may be undertaking. He has asked you to consider the following information about the two securities: Explain what is meant by (i) systematic and (ii) unsystematic risk. Based on the information your client has provided, explain to him which security has the greater total risk. Which of the two securities has the greater systematic risk? Which has the greater unsystematic risk? Explain which security will have a higher risk premium and why. (i) The equation for the Capital Asset Pricing Model is as follows: Ri=Rf+i[E(Rm)Rf] The CAPM equation decomposes the expected return on a particular asset into three parts. Explain what type of risk each of the three parts is rewarding investors for undertaking. (ii) Consider securities A, B, and C plotted on the graph below. Are each of these securities correctly priced, underpriced, or overpriced? Explain your answer. The Reward to Risk Ratio ALDOT is a new firm in a rapidly growing industry. ALDOT is planning on increasing its annual dividend by 15% a year for the next 4 years and then decreasing the growth rate to 3.5% per year indefinitely. The company just paid its annual dividend in the amount of 0.20 per share. What is the current value of one share of this equity if the required rate of return is 15.5% ? a) Your client is considering investing his money in one of two securities but is unsure about the risk he may be undertaking. He has asked you to consider the following information about the two securities: Explain what is meant by (i) systematic and (ii) unsystematic risk. Based on the information your client has provided, explain to him which security has the greater total risk. Which of the two securities has the greater systematic risk? Which has the greater unsystematic risk? Explain which security will have a higher risk premium and why. (i) The equation for the Capital Asset Pricing Model is as follows: Ri=Rf+i[E(Rm)Rf] The CAPM equation decomposes the expected return on a particular asset into three parts. Explain what type of risk each of the three parts is rewarding investors for undertaking. (ii) Consider securities A, B, and C plotted on the graph below. Are each of these securities correctly priced, underpriced, or overpriced? Explain your answer. The Reward to Risk Ratio ALDOT is a new firm in a rapidly growing industry. ALDOT is planning on increasing its annual dividend by 15% a year for the next 4 years and then decreasing the growth rate to 3.5% per year indefinitely. The company just paid its annual dividend in the amount of 0.20 per share. What is the current value of one share of this equity if the required rate of return is 15.5%
