Monday March 31, 2008Finance 301SI- CAPM1. Capital Asset Pricing Model (CAPM) is a model that suggests that there is a Security Market Line (SML) that states that a stocks required return = the risk free return + arisk premium that reflects the risk after diversification. How is this equation notated?2. What is the primary conclusion of the CAPM?3. What is the average beta? Low risk beta? High risk beta?4. How is the beta usually calculated?5. What is the equation for the SML?6. Assume that the risk free rate is 6.5% and the expected return on the market is 14%. What is the required rate of return on a stock with a beta of 0.8?7. Assume that the risk free rate is 6% and the market risk premium is 8%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.5%?8. You have $300,000 to invest, and you decide to put $140,000 into a stock with a beta of 1.3, $100,000 into a stock with a beta of 0.7, and the remaining $60,000 into a stock with a beta of 0.5. What is your portfolio’s beta?9. What would happen to the SML if inflation were expected to increase by 4%? What would happen if risk aversion increased which caused the MRP to increase by 4%?10. What else should you remember about
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