Question
QUESTION THREE a. The Y-axis intercept of the Security Market Line (SML) indicates the required rate of return on an individual stock with a beta
QUESTION THREE
a. The Y-axis intercept of the Security Market Line (SML) indicates the required rate of return on an individual stock with a beta of 1.0.
i. True
ii. False
b. State which type of risk each of the following are:
i. Labour strikes
ii. Rising inflation
iii. Equipment failure
iv. Management incompetence Currency BID/ Buying Ask/ Selling US Dollar $ 10 11 GB Pound 14 15 Euro 11 12 Rand R 0.6 0.7 4
c. Using the table below, calculate the following for both stocks:
State of Economy | Probability | Returns of Stock A | Returns of Stock B |
Fair | 0.4 | 15% | 12% |
Great | 0.3 | 25% | 19% |
Poor | 0.3 | -10% | 8% |
i. What are the expected returns and standard deviations for these stocks?
ii. Using the information in the previous problem, suppose you have K 20, 000 in total. If you put K 15, 000 in Stock A and the remainder in Stock B,
what would be the expected return, covariance and standard deviation of your portfolio? d. Explain the function of the SML. e. If the risk-free rate is 8 percent, the expected return on the market is 13 percent, and the expected return on Security J is 15 percent, then what is the beta of Security J?
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