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Assignment : Risk, Return, and Capital Asset Pricing Model Problems
In this assignment, assume that you are nearing graduation and applying for a job with a financial services firm. As part of the evaluation process, you are asked to provide answers to a series of questions on risk return and the capital asset pricing model. Your responses will be based on the data for Company A and Company B below.
Year
Company A's Return
Company B's Return
Average Market Return
1995
5.0%
4.0%
2.0%
1996
-8.0%
6.0%
1997
3.0%
7.0%
1998
8.0%
1999
9.0%
2000
10.0%
2001
1.0%
11.0%
2002
2003
2004
2005
-2.0%
2006
2007
2008
2009
-4.0%
2010
-5.0%
Procedure
1. For each company,
2. Using the CAPM, compute the expected return rate of return for Companies A and B. Assume a Market Risk Premium of 3%, a Risk-Free Rate of 4%, a Beta for company A of .90 and a Beta for company B of 1.3.
3. Using the CAPM, compute the expected rate of return for a portfolio with 25% stake in company A and a 75% stake in company B. Assume a Market Risk Premium of 3% and a Risk-Free Rate of 4%.
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