Problem 1:

Using the equation of the capital asset valuation model (CAPM), determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the return on assets is risk-free it is 1.25% (RF = 1.25%). Please show all computations.

Active Beta

SKT 0.65

Cost. 0.90

ITS 1.42

AMZN 1.57

V 0.94

Problem 2:

If the return on the risk-free asset is 2.25% (RF = 2.25%) and the market return is 6.50% (Rm = 6.50%), how much is the beta of Bank of America, BAC, if it has had a return of 9.14%? Please show all computations.

Problem 3:

Consider the assets in Problem 1 with their respective beta coefficients to answer the following questions:

a. Which of the assets represents the most sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have if you add it to an investment portfolio in greater proportion than all other assets?

b. Which asset represents the least sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have, if you add it to an investment portfolio in greater proportion than all other assets?