Explain the interactions among market efficiency, capital budgeting, and the cost of capital.
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Get Help Now!- Give two examples of anomalies in the financial markets.
- What does the existence of these anomalies say about financial market efficiency?
- Use the following information to answer the questions below.
| Security | Return | Standard Deviation | Beta |
| A | 15% | 8% | 1.2 |
| B | 12% | 14% | 0.9 |
- Which of A and B has the least total risk? The least systematic risk?
- What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the funds invested in B?
- Calculate the risk free rate of return and the market risk premium
(i.e., Rf and RM – Rf). - What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B, and 40% in the risk-free asset?
(For questions (d) and (e), assume the risk free rate of return is 5%.) - What is the portfolio expected return with 125% invested in A and the remainder in the risk-free asset via borrowing at the risk-free interest rate?
- What is the beta of the portfolio created in part (e)?
- Consider the following information on three stocks.
| Rate of Return if State Occurs | ||||
| State of economy | Probability of state of economy | Stock A | Stock B | Stock C |
| Boom | 0.5 | 0.2 | 0.35 | 0.6 |
| Normal | 0.3 | 0.15 | 0.12 | 0.05 |
| Bust | 0.2 | 0.01 | -0.25 | -0.5 |
- If your portfolio is invested 40% each in A and C, and 20% in B, what is the portfolio expected return?
- What is the variance of this portfolio?
- What is the standard deviation of this portfolio?
- If the expected T-Bill rate is 5%, what is the expected risk premium on the portfolio?
- If the expected inflation rate is 2.50%, what are the approximate and exact expected real returns on the portfolio?
- If the expected T-Bill rate is 5% and the expected inflation rate is 2.50%, what are the approximate and exact expected real risk premiums on the portfolio?
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