Principles of Finance

(SEM202)


Tutorial 6

Chapter 5: Risk and Return

Warm-up Exercise E8-6
a.thatCalculate
has a the
beta ofrequired
1.8, rate
given a of return
risk-free for
rate an
of 5% asset
and
a market return of 10%.
b.recent
If investors have
geopolitical become
events andmore
the risk averse
market returndue to
rises
toasset?
13%, what is the required rate of return for the same
c.security
Use your
marketf i
n dings
line in
(SML),par
andta to
then graph
use the
your f i
ninitial
dings
inthepaSML.b to graph (on the same set of axes) the shift in
Problem P8-1
Rate
Paul of
Chanreturn A
wishes f i
n
toancial analyst
estimate the for
rate Smar
of tSecurities
return for two Limited,
similar-
risk investments,
immediate past A and
returns B. Paul
will ser v
es research
as reasonableindicates that
estimates the
of
future
market returns.
values A
of year
$63,000ago, investment
and $35,000, A and investment
respectively. B
During had
the
year, investment
investment B A
generated generated
cash f lcash
o w off l
o w
$2,800.of $6,100,
T he and
current
market values
respectively. of investments A and B are $71,000 and $32,000,
a.using
Calculate the expected rate
the most recent year s data. of return on investments A and B
b.should
Assuming the two investments
Paul recommend? Why? are equally risky, which one
Problem P8-3
Problem P8-5
Problem P8-9
Problem P8-13
Problem P8-26
Manipulating CAPM Use the basic equation for the capital asset pricing model
(CAPM) to work each of the following situations.
a.rateFind the required return for an asset with a beta of 2.20 when the risk-free
and market return are 5% and 32%, respectively.
b. Find the risk-free rate for a rm with a required return of 23.75% and a beta of
1.25 when the market return is 20%.
c. Find the market return for an asset with a required return of 18% and a beta of
1.20 when the risk-free rate is 8%.
d.rateFind the beta for an asset with a required return of 15% when the risk-free
and market return are 3% and 15%, respectively.