An investor is considering investing in the following two shares: Beta Fortress plc. 1.4 Castle plc 0.5 A) if the return on treasury bills is 5% and the market risk premium is 10%, what is the expected return of a portfolio made up of 40% fortress shares and 60% of castle shares? B) explain beta in the context of the CAPM and explain what the betas for fortress and castle shares imply about those shares C) shares in the empire plc have a beta of 0.9 and are expected to have a return of 16%. Given the information in part A are empire shares correctly priced according to the CAPM? Explain your answer and what is likely to happen to the shares in Empire PLC. D)explain what to the market risk premium and risk free rate of return in the CAPM represent. E)rxplain why it is difficult to empirically test the CAPM.
An investor is considering investing in the following two shares: Beta Fortress plc. 1.4 Castle plc 0.5 A) if the return on treasury bills is 5% and the market risk premium is 10%, what is the expected return of a portfolio made up of 40% fortress shares and 60% of castle shares? B) explain beta in the context of the CAPM and explain what the betas for fortress and castle shares imply about those shares C) shares in the empire plc have a beta of 0.9 and are expected to have a return of 16%. Given the information in part A are empire shares correctly priced according to the CAPM? Explain your answer and what is likely to happen to the shares in Empire PLC. D)explain what to the market risk premium and risk free rate of return in the CAPM represent. E)rxplain why it is difficult to empirically test the CAPM.
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter5: Risk Analysis
Section: Chapter Questions
Problem 11QE: Market equity beta measures the covariability of a firms returns with all shares traded on the...
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An investor is considering investing in the following two shares:
Beta
Fortress plc. 1.4
Castle plc 0.5
A) if the return on treasury bills is 5% and the market risk premium is 10%, what is the expected return of a portfolio made up of 40% fortress shares and 60% of castle shares?
B) explain beta in the context of the CAPM and explain what the betas for fortress and castle shares imply about those shares
C) shares in the empire plc have a beta of 0.9 and are expected to have a return of 16%. Given the information in part A are empire shares correctly priced according to the CAPM? Explain your answer and what is likely to happen to the shares in Empire PLC.
D)explain what to the market risk premium and risk free rate of return in the CAPM represent.
E)rxplain why it is difficult to empirically test the CAPM.
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