Assume the CAPM is true. Further assume the risk free rate is 5%, the expected r

Question

Assume the CAPM is true. Further assume the risk free rate is 5%, the expected return on the market portfolio is 12% and the standard deviation of market returns is 20% If an investment with a beta of 1.3 offers an expected return of 14.5%. does it have a positive NPV? It investors require a return of 15% from holding Co X's stock, what is Co X's beta? What is the beta of a portfolio that has a 75% investment in the risk-free asset and 15 investment in the market portfolio? A project has a beta of 1 and standard deviation of returns equal to 40%. it this project offers an expected return of 12.5%. should you invest in it? Stock Y has a standard deviation of returns equal to 40%. If the correlation between the returns on stock Y and market returns is 0.4, what is the beta of sto

Explanation / Answer

a.

b.

Risk Free Rate = 5% Market return = 12% Beta = 1.3 Required Return = Risk free rate+Beta*(Market Return-Risk free return) = 5+1.3*(12-5) = 14.1% Expected Return = 14.50% Required return = 14.10% Since, expected return is more than required return,Investment has positive NPV.

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