- Fill in the graph similar to Figure 11.4 by: First, calculating return, using the Beta on X Axis, and the CAPM formula (E(Ri) = Rf + BI * [E(RM) Rf] ).then,
ii. Please plot the each pair of Beta and Return together for each point on the line, i.e. (Beta = 0.0, Return, 2%) (B=2.5, R=0.027 or 27%), right next to dot on Security Market Line.
5) (20 points) Capital Asset Pricing Model and Beta The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model (hereafter, CAPM) by William Sharpe (1964) with the given assumptions regarding the risk free rate and market rate to answer the following questions: A) i. Fill in the graph similar to Figure 11.4 by: First, calculating return, using the Beta on X Axis, and the CAPM formula (E(Ri) = Rf +BI * [E(RM) - Rf] ).then, ii. Please plot the each pair of Beta and Return together for each point on the line, i.e. (Beta = 0.0, Return, 2%) (B=2.5, R=0.027 or 27%), right next to dot on Security Market Line. Security Market Line 0.25 0.20 Exp Return 0.15 R. 0.10 0.05 RA 0.00 2.00 2.00 250 Beta - Stock/Portfolio Volatility Hint: As I am posting the exam, you may use the following: this is an embedded MS Excel Object and Chart, so if you set your cursor over the chart and right click you mouse, then choose edit data, this may assist in understanding the Security Market Line concept, as well. Or you may choose to use your own. 7 B) What is the market risk premium of the CAPM, using a Rf of 2.0 and a Rm of 12%? C) What is the required return on an investment with a beta of 2.0? Is the beta above or below the Market beta? D) If the market expects a return of 13.5% from stock X. what is its beta (Here we solve for Beta, using all given components of CAPM, except beta which is not given)? | #pts. Component (no. 5) Timeline General Formula Calculations Steps Answer Total Points of 20 pts) The End. Have an incredible summer! 5) (20 points) Capital Asset Pricing Model and Beta The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model (hereafter, CAPM) by William Sharpe (1964) with the given assumptions regarding the risk free rate and market rate to answer the following questions: A) i. Fill in the graph similar to Figure 11.4 by: First, calculating return, using the Beta on X Axis, and the CAPM formula (E(Ri) = Rf +BI * [E(RM) - Rf] ).then, ii. Please plot the each pair of Beta and Return together for each point on the line, i.e. (Beta = 0.0, Return, 2%) (B=2.5, R=0.027 or 27%), right next to dot on Security Market Line. Security Market Line 0.25 0.20 Exp Return 0.15 R. 0.10 0.05 RA 0.00 2.00 2.00 250 Beta - Stock/Portfolio Volatility Hint: As I am posting the exam, you may use the following: this is an embedded MS Excel Object and Chart, so if you set your cursor over the chart and right click you mouse, then choose edit data, this may assist in understanding the Security Market Line concept, as well. Or you may choose to use your own. 7 B) What is the market risk premium of the CAPM, using a Rf of 2.0 and a Rm of 12%? C) What is the required return on an investment with a beta of 2.0? Is the beta above or below the Market beta? D) If the market expects a return of 13.5% from stock X. what is its beta (Here we solve for Beta, using all given components of CAPM, except beta which is not given)? | #pts. Component (no. 5) Timeline General Formula Calculations Steps Answer Total Points of 20 pts) The End. Have an incredible summer
