## Corporate finance, CAPM, beta equation, practice exam problems

 Author Message NEAS Supreme Being         Group: Administrators Posts: 4.2K, Visits: 1.2K Corporate finance, CAPM, beta equation, practice exam problems(The attached PDF file has better formatting.) *Question 1.1: Expected ReturnA stock with a CAPM β of 0.800 has an expected return of 12%, and a stock with a CAPM β of 1.200 has an expected return of 14%. What is the expected return for a stock with a CAPM β of 1.500?15.0%15.5%16.0%16.5%17.0%Answer 1.1: BWe use the CAPM equation and a pair of simultaneous linear equations to find the risk-free rate and the market risk premium.12% = risk-free rate + 0.800 × market risk premium 14% = risk-free rate + 1.200 × market risk premium A (1.200 – 0.800) × market risk premium = 14% – 12% = 2% A market risk premium = 2% / 0.4 = 5%To find the risk-free rate: 12% = risk-free rate + 0.8 × 5% A risk-free rate = 8%The expected return on this stock is 8% + 1.5 × 5% = 15.5%*Question 1.2: BetasThe CAPM beta of stock W is 1.200, the CAPM beta of stock Y is 0.800, and the risk-free rate equals the market risk premium. How much greater is the expected return on Stock W than the expected return on Stock Y?The same20% greater22% greater40% greater50% greaterAnswer 1.2: CLet the risk-free rate be R, so the market risk premium is also R.The expected return on Stock W is R + 1.2 × R = 2.2 × R.The expected return on Stock Y is R + 0.8 × R = 1.8 × R.The ratio of the expected returns is 2.2R / 1.8R = 1.222 Attachments CorpFinance.final.exam.pps.CAPM.beta.equation..master.pdf (543 views, 36.00 KB) Edited 4 Years Ago by NEAS NEAS Supreme Being         Group: Administrators Posts: 4.2K, Visits: 1.2K +x NEAS - 7/6/2006 1:52:20 PMCorporate finance, CAPM, beta equation, practice exam problems(The attached PDF file has better formatting.) *Question 1.1: Expected ReturnA stock with a CAPM β of 0.800 has an expected return of 12%, and a stock with a CAPM β of 1.200 has an expected return of 14%. What is the expected return for a stock with a CAPM β of 1.500?15.0%15.5%16.0%16.5%17.0%Answer 1.1: BWe use the CAPM equation and a pair of simultaneous linear equations to find the risk-free rate and the market risk premium.12% = risk-free rate + 0.800 × market risk premium 14% = risk-free rate + 1.200 × market risk premium A (1.200 – 0.800) × market risk premium = 14% – 12% = 2% A market risk premium = 2% / 0.4 = 5%To find the risk-free rate: 12% = risk-free rate + 0.8 × 5% A risk-free rate = 8%The expected return on this stock is 8% + 1.5 × 5% = 15.5%*Question 1.2: BetasThe CAPM beta of stock W is 1.200, the CAPM beta of stock Y is 0.800, and the risk-free rate equals the market risk premium. How much greater is the expected return on Stock W than the expected return on Stock Y?The same20% greater22% greater40% greater50% greaterAnswer 1.2: CLet the risk-free rate be R, so the market risk premium is also R.The expected return on Stock W is R + 1.2 × R = 2.2 × R.The expected return on Stock Y is R + 0.8 × R = 1.8 × R.The ratio of the expected returns is 2.2R / 1.8R = 1.222
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