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Problems Chapter 8
Presented by
Muhammad Khalid Sohail
Problems
P.1 Assume that you expect the
economy’s rate of inflation to be 3
percent, giving an RFR of 6 percent and
a market return (R) of 12 percent.
a. Draw the SML under these
assumptions.
b. Subsequently, you expect the rate of
inflation to increase from 3 percent to 6
percent. What effect would this have on
the RFR and the Rm? Draw another
SML on the graph from Part a.
c. Draw an SML on the same graph to
reflect an RFR of 9 percent and an Rm
of 17 percent. How does this SML differ
from that derived in Part b? Explain
what has transpired.
B=1
Problem 2
24 22 0.75
U .1250
P-3 22 24 0.75 22
51 48 2.00
N 48 51 2.00 .1042
48
40 37 1.25
D .1149
37 40 1.25 37
Market B=1
For Intel:
COV i,m = (.72)(.1210)(.0550) = .00479
c
• L Expected Ret by
Stock Ret CAPM Beta Result
Intel 0.2 0.1918 1.597under
Ford 0.15 0.1418 0.883under
Anheuser Busch 0.19 0.1337 0.767under
Merk 0.1 0.1586 1.123over
Problem 13