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Ch. 7 Assignment If the simple CAPM is valid, which of the situations in Problems 13–19 below are possible? Explain. Consider each situation independently. 16. (LO...

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Ch. 7 Assignment
If the simple CAPM is valid, which of the situations in Problems 13–19 below are possible? Explain. Consider each situation independently.
    16.
    
(LO 7-1)
    17.
    
    19.
    
    20.
    Go to Connect and link to Chapter 7 materials, where you will find a spreadsheet with monthly returns for GM, Ford, and Toyota, the S&P 500, and Treasury bills. (LO 7-1)
    a.
    Estimate the index model for each firm over the full five-year period. Compare the betas of each firm.
    b.
    Now estimate the betas for each firm using only the first two years of the sample and then using only the last two years. How stable are the beta estimates obtained from these shorter subperiods?
In Problems 21–23 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.
    23.
    A stock has an expected return of 6%. What is its beta? (LO 7-2)
    24.
    Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. (LO 7-2)
    a.
    Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)?
    b.
    If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector?
    26.
    Based on cu
ent dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is cu
ently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. (LO 7-2)
    a.
    If you cu
ently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain.
    b.
    If instead you could invest only in bills and one of these portfolios, which would you choose?
Answered Same Day Nov 07, 2022

Solution

Shakeel answered on Nov 07 2022
47 Votes
Ans 16
The situation is not possible. As the risk of security increases the expected return also increases. But portfolio A has highest return of 20% but its risk i.e., Std. deviation of 22% is less than of market (24%). So, risk-return combination of portfolio A is not justified.
Ans 17
The situation is not possible. As the systematic risk of security increases the expected return also increases. But portfolio A has return of 16%, lower than market (18%) but its systematic risk i.e., Beta is 1.5, higher than the market (1.0). So, risk-return combination of portfolio A is not justified.
Ans 19
The situation is possible...
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