Instructions to students: All questions are compulsory
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TASK: ECO3010 Corporate Finance Assignment
The future value of $120, 000 expected five years from today at an interest rate (discount rate) of 10% per year is:
As the number of stocks in a portfolio is increased:
- unique risk decreases and approaches zero
- market risk decreases
- unique risk decreases and becomes equal to market risk
- total risk approaches zero
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Remember the hyperbolic relationship between the number of securities in a portfolio and the risk of the portfolio (standard deviation/variance). A well-defined only by market risk, hence unique risk (the risk brought about by each security) tends towards zero as NàThe expected return — beta relationship of the CAPM is graphically represented by
- the security market line.
- the capital market line.
- the efficient frontier with a risk-free asset.
- the efficient frontier without a risk-free asset.
Question 4: ECO3010 Corporate Finance-City, University of London
The SML is, essentially, CAPM! (see slides)
An “aggressive” common stock would have a “beta”
- equal to zero.
- greater than one.
- equal to one.
- less than one.
An aggressive stock is more volatile than the market portfolio.
Your opinion is that security A has an expected rate of return of 0.145. It has a beta of 1.5. The risk-free rate is 0.04 and the market expected rate of return is 0.11. According to the Capital Asset Pricing Model, this security is
- fairly priced.
- cannot be determined from data provided.
All correctly priced stocks lie on the SML. Hence, if beta(calculated)=beta(given) the stock is correctly priced; if beta(calculated)>beta(given), the stock is underpriced (since for a given amount of risk, it yields a higher return); if beta(calculated)<beta(given), the stock is overpriced.
For each additional 2% change in market return, the return on a stock having a beta of 1 changes, on average, by
- None of the above
A stock with a beta of 1 exactly follows movements in the market portfolio.
Beta of Treasury bills is: