The capital asset pricing model (CAPM) is an important tool to identify the expected return of a portfolio. This model takes into account market expected rate of return, the risk-free rate and the beta of a particular investment or portfolio (Investopedia, n.d.). Beta represents the investment or portfolio sensitivity to the market fluctuation. The CAPM is based on few assumptions: * There are no transaction and taxation costs. * Investors are assumed to invest in diversified portfolios
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Flow 0 ($1000) 1 250 2 400 3 500 4 600 5 600 a. What is the return expected on this investment measured in dollar terms of the opportunity cost rate is 10 percent? b. Provide an explanation, in economic terms, of your answer. c. What is the return on this investment measured in percentage terms? d. Should this investment be made? Explain your answer? Chapter 10 10-1 Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound
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Understanding the Concepts Freddie Bailey FIN 100 Professor John Underwood May 27, 2012 Identify the components of a stock’s realized return. A realized return is the amount of actual gain that is made on the value of a portfolio over a specific evaluation period. The components of a stock are realized return is dividends, distributions, and share price appreciation. Dividends play a very important role in stock realized dividends may be in the form of cash, stock or property
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expected return and risk tolerance are assessed so that different weights can be assigned to different assets classes and categories. Holding a portfolio is less risky than the lowest risk individual share because it is possible to select stocks whose individual performance is independent of other investments in the portfolio, for example if an investor invests in 10 different companies the risk which affects one company’s shares will not affect the portfolio as a whole thus diversification of risk. As
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the three (3) securities you chose. Be sure to include such information as name, company it represents (if applicable), pricing, and historical performance. 3. Assess the current risk return relationship of each of the three (3) securities. 4. Recommend one (1) strategy for maximizing return for the current risk return relationship identified for each of the three (3) securities. 5. Suggest how the Federal Reserve and its monetary policy affect each of the three (3) securities today. More
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Chapter 6 1. Only a reflect pure market risk a. market risk b. firm-specific risk c. can be firm-specific, or due to market factors d. firm-specific risk e. either firm-specific or market risk 1. a and e 2. a and c The portfolio risk is calculated through the standard deviation of the portfolio. It includes the variance of the real estate, the correlation/covariance between real estate and stocks, the correlation/covariance between real estate and bonds. 3. Only a is valid. 1
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Problems on Risk and Return 1) Using the following returns, calculate the arithmetic average returns, the variances and the standard deviations for X and Y. Year | X | Y | 1 | 8% | 16% | 2 | 21 | 38 | 3 | 17 | 14 | 4 | -16 | -21 | 5 | 9 | 26 | 2) You bought one of the Great White Shark Repellant Co’s 8 per cent coupon bonds one year ago for $1030. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today ,when the required
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expected rate of return is 13%. The risk-free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. Answer: * Firstly we are using Use zero-growth Dividend Discount Model to calculate the intrinsic value, which is the market price. * So calculating the Beta , β=Security's risk premium/market's risk premium=6/8=0.75
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University, Montreal, Canada Abstract Purpose – Researchers have proposed characteristics-based pricing models as an alternative to risk-based pricing models. While supported empirically, these characteristic-based models lack theoretical support. This paper seeks to reformulate an asset-pricing model (RAPM) to demonstrate why firm characteristics help to explain stock returns. Design/methodology/approach – The RAPM is grounded in an economic setting where two groups of agents hold different beliefs about
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of life affect an individual investor’s risk tolerance; b) explain the role of situational and psychological profiling in understanding an individual investor; c) compare the traditional finance and behavioral finance models of investor decision making; d) explain the influence of investor psychology on risk tolerance and investment choices; e) explain the use of a personality typing questionnaire for identifying an investor’s personality type; f) compare risk attitudes and decision-making styles among
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