Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Was having difficulty with this practice problem set. Could you please help? Will be sure to leave a review! Thank you so much! Consider an

Was having difficulty with this practice problem set. Could you please help? Will be sure to leave a review! Thank you so much!

image text in transcribed

image text in transcribed

Consider an economy with the following information. Stock Price Today (PC) Expected Dividend (D) Expected ex-dividend price next year (P) 1.50 53.50 1.00 36.00 A B 48.50 31.15 Note: The ex-dividend price is the price of the stock immediately after the dividend is paid. The risk-free rate is 8% and the expected return on the market is 14%. The return covariance matrix for the securities is (on the diagonal are the variance (67 ) terms and off the diagonal are the covariance ( 0, ) terms): B Market Market A B A 0.300 0.240 0.250 Market 0.081 0.054 0.090 Assume that the assumptions of the CAPM hold. (a) (5 points) Using the information above write the equation for the capital market line in this economy. (b) (5 points) Using the information above write the equation for the security market line in this economy. (c) (6 points) Compute the betas for stocks A, and B. (d) (4 points) Using the price and dividend information above, determine whether the expected returns on stock B is correct according to the CAPM. If i differs from the expected return implied by the CAPM, determine the correct price today using a discounted cash-flow approach

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Digital Finance Big Data Start-ups And The Future Of Financial Services

Authors: Perry Beaumont

1st Edition

0367146797, 978-0367146795

More Books

Students also viewed these Finance questions