on the riskier stock exceed the required return on the less risky stock? 3. Required rate of return. Suppose rRF =9%‚ rM = 14% and bi = 1.3 a. What is ri‚ the required return on stock i? b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri? c. Now assume rRF remains at 9%‚ but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant
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Problems (pp. 210-211) 5-1 Bond Valuation with Annual Payments Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually‚ the bonds have a $1‚000 par value‚ and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n‚ where F = par value C = maturity value r = coupon rate per coupon payment period i = effective interest rate per coupon payment period
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8 – 23 MERRILL FINCH INC. RISK AND RETURN a. (1) Why is T-bill’s return independent of the state of the economy? Do T-bill’s promise a completely risk-free return? Explain (2) Why are High Tech’s returns expected to move with the economy‚ whereas‚ Collections’ are expected to move counter to the economy? 1. The 5.5% T-bill return does not depend on the state of the economy because the Treasury must redeem the bills at par regardless of the state of the economy; therefore‚ T-bills are
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and Asset Pricing Models Portfolio Theory Capital Asset Pricing Model (CAPM) Efficient frontier Capital Market Line (CML) Security Market Line (SML) Beta calculation Arbitrage pricing theory Fama-French 3-factor model Portfolio Theory • Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard deviation of 40 percent. If the correlation between A and B is 0.6‚ what are the expected return and standard
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Towson University Department of Finance Fin331 Dr. M. Rhee 2010 Spring NAME: ID#: 1. If the interest is compounded quarterly with 8% APR‚ which of the following statements is CORRECT? a. The periodic rate of interest is 2% and the effective rate of interest is 4%. b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. d. The periodic rate of interest is 2% and
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Wachowicz Corporation issued 15-year‚ noncallable‚ 7.5% annual coupon bonds at their par value of $1‚000 one year ago. Today‚ the market interest rate on these bonds is 5.5%. What is the current price of the bonds‚ given that they now have 14 years to maturity? $1‚077.01 $1‚104.62 $1‚132.95 $1‚162.00 $1‚191.79 Moerdyk Corporation’s bonds have a 10-year maturity‚ a 6.25% semiannual coupon‚ and a par value of $1‚000. The going interest rate (rd) is 4.75%‚ based on semiannual compounding
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versus future consumption‚ the riskiness of the loan‚ the expected future rate of inflation. High inflation and high risk will result in high interest rates. b. What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rRF)? How are these two rates measured? The real risk-free rate of interest is the rate that would exist on default-free securities when there is no inflation. The nominal risk-free rate is equal to the real risk-free rate plus an inflation premium
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of -0.25‚ and a beta coefficient of -0.5. Security B has an expected return of 11%‚ a standard deviation of returns of 10%‚ a correlation with the market of .75‚ and a beta coefficient of 0.5. Which security is more risky? Why? Using SML: rA= rrf + (rm – rrf)bi Security A is riskier because of its negative correlation to the market. Also its beta is negative causing to believe its risk will increase over time. 24-8 You are given the following set of data: Historical Rates of Return | | |
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consumption they are willing to defer‚ hence how much they will save at different interest rates. Higher risk and higher inflation also lead to higher interest rates. B. What is the real risk-free rate of interest (r*) and the nominal riskfree rate (rRF)? How are these two rates measured? Answer: [Show S6-3 and S6-4 here.] Keep these equations in mind as we discuss interest rates. We will define the terms as we go along: r = r* + IP
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Integrated Case 8-23 Merrill Finch Inc. Risk and Return Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with Merrill Finch Inc.‚ a large financial services corporation. Your first assignment is to invest $100‚000 for a client. Because the funds are to be invested in a business at the end of 1 year‚ you have been instructed to plan for a 1-year holding period. Further‚ your boss has restricted you to the investment alternatives
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