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Problem 1 7. Suppose you have a portfolio made up of $ 1 million in government bonds of United States long-term issued. a) Will your

Problem 1

7. Suppose you have a portfolio made up of $ 1 million in government bonds of

United States long-term issued.

a) Will your investment be risk free?

b) Now suppose you invest your million in 90-day US treasury bills. Every 90

days the bills expire and you must reinvest all the capital. If you want to maintain a standard

of constant life, is your investment truly risk-free?

8. Suppose historically rm = 12%, rf = 5%, and m = 21%. Based on this historical data, which

is the price that the market assigns to each unit of risk?

Problem 2

1. Suppose the risk-free rate is 5% and the expected return on the market portfolio is

of 15%. If a common stock has a Beta of 0.60, what is its expected return based on

with the capm? If another common stock has an expected return of 15%, what does its Beta have to be?

2. The risk-free interest rate is 5% and the expected profitability of the market portfolio is

12%. Assuming that the hypotheses of the capm are fulfilled:

a) What is the market risk premium?

b) What is the required return on an investment with a Beta of 1.5?

c) If a stock has a Beta = 1 and offers an expected return of 10%, is it overvalued?

d) Draw a graph that shows how the expected return varies with the Beta.

3. An American Treasury bond offers a yield of 5%. A common share has a Beta of 0.70

and an expected return of 12%.

a) What is the expected return of a portfolio made up of equal investments in these two

assets?

b) If a portfolio made up of these two assets has an expected return of 15%, which

is your beta?

c) If a portfolio made up of these two assets has a Beta of 1.20, what are the factors

weighting? How is the weighting factor for the risk-free asset interpreted?

8. The Caracol company is considering the possibility of issuing shares to finance a project

expansion. Caracol's financial analysts have determined that the project has the same

risk than the market portfolio, being that it has an expected return of 15% and the rate

risk free is 5%. The performance of the project is estimated at 20%. The project will be carried out

unless:

a) The company's Beta is greater than 1.5.

b) The company's Beta is less than 1.5.

c) Whatever the Beta of the company, since what matters is the Beta of the project.

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