I need someone to review my answers for accuracy and then help me explain the an
ID: 2705807 • Letter: I
Question
I need someone to review my answers for accuracy and then help me explain the answers in written detail.
8. The common stock for a particular company is known to have a beta (?) of 1.20. The expected return on the market (rM) is 9 percent and the risk-free rate (rRF) is 5 percent.
(a) Compute a fair rate of return based on this information.
Market Return 9% (A)
Risk Free Rate 5% (B)
Beta 1.2 (C)
Fair Rate of Return 9.80% = B+ (C * (A-B))
(b) What would be a fair rate of return if the beta were 0.85?
Market return 9%
Risk Free Rate 5%
Beta 0.85
Fair rate of Return 8.40%
(c) What would be a fair rate of return if the expected return on the market increased to 12 percent and the beta remained at 0.85?
Market return 12%
Risk Free Rate 5%
Beta 0.85
Fair Rate of Return 10.95%
9. The expected return for the general market (rMKT) is 12.8 percent, and the market risk premium (i.e., RPM) is 4.3 percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68, respectively. What are the required rates of return for the three securities?
Moe Larry Curley
Beta 0.82(A) 0.57 0.68
Risk Free Rate 8.5% (B) 8.5% 8.5%
Risk premium 4.3% (C) 4.3% 4.3%
Required rate of Returns 12.026% = B+ (A*C) 10.951% 11.424%
Explanation / Answer
8
a.c
b.d
c.c
9.e
10.d