1. Assume that common stock values are consistent with the following model: E(R
ID: 2707774 • Letter: 1
Question
1. Assume that common stock values are consistent with the following model:
E(Rx) = rf + Bx{E(Rm)- rf)}
E(Rx) = required return on asset x.
rf = risk free rate of interest
Bx = Beta of security x.
E(Rm) = expected return on market portfolio.
E(Rm)- rf = market risk premium
If the risk premium for security x increases but the risk free rate does not change, security x will be undervalued until the price of security x increases.
True Or False?
2.MSFT 1.1
Boeing 1.02
SBUX .82
MCD .31
Based on the above Tickers and Betas and the assumption that you own a well-diversified portfolio of financial assets decide if the following statement is true or false.
Selling MSFT and using the proceeds to buy shares of SBUX would lower the risk of your portfolio and lower the portfolio
Assume that common stock values are consistent with the following model: E(Rx) = rf + Bx{E(Rm)- rf)} E(Rx) = required return on asset x. rf = risk free rate of interest Bx = Beta of security x. E(Rm) = expected return on market portfolio. E(Rm)- rf = market risk premium If the risk premium for security x increases but the risk free rate does not change, security x will be undervalued until the price of security x increases. True Or False? 2.MSFT 1.1 Boeing 1.02 SBUX .82 MCD .31 Based on the above Tickers and Betas and the assumption that you own a well-diversified portfolio of financial assets decide if the following statement is true or false. Selling MSFT and using the proceeds to buy shares of SBUX would lower the risk of your portfolio and lower the portfolio's expected return. True or False? A firm whose common stock has a Beta of 1.4 will pay less for equity capital than a firm whose stock has a Beta of .87. True or False? Assume that common stock values are consistent with the following model: E(Rx) = rf + Bx{E(Rm)- rf)} E(Rx) = required return on asset x. rf = risk free rate of interest Bx = Beta of security x. If the risk free rate of interest increases but the expected risk premium for security x remains the same; the price of security x will no longer be on the security market line until its price increases. True or False?Explanation / Answer
1] true
AS E[R] WILL INCREASE AND E[R] WILL BECOME GREATER THAN Re.
So the stock will be undervalued.
2]true
Reason:- Selling MSFT and using the proceeds to buy shares of SBUX would lower the risk of your portfolio and lower the portfolio
1] true
AS E[R] WILL INCREASE AND E[R] WILL BECOME GREATER THAN Re.
So the stock will be undervalued.
2]true
Reason:- Selling MSFT and using the proceeds to buy shares of SBUX would lower the risk of your portfolio and lower the portfolio
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