Business, 05.02.2021 22:50 cathydaves

The market price of a security is $74. Its expected rate of return is 20.2%. The risk-free rate is 3% and the market risk premium is 6.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)

Answers: 1

Show answers

Answers

Answer from: huwoman

The market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged) will be $44.10.

Explanation:

Note: This question is not complete. The complete question is therefore presented before answering the question as follows:

The market price of a security is $74. Its expected rate of return is 20.2%. The risk-free rate is 3% and the market risk premium is 6.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)

Assume that the stock is expected to pay a constant dividend in perpetuity.

Explanation of the answer is now given as follows:

Since the correlation coefficient with the market portfolio doubles (and all other variables remain unchanged), it implies that beta and also the risk premium will also double.

From the question, we can obtain:

Current risk premium = Expected rate of return - Market risk premium = 20.2% - 6.5% = 13.70%

As the current risk premium will double, we have:

New risk premium = Current risk premium * 2 = 13.70% * 2 = 27.40%

Also, we have:

New discount rate = New risk premium + Market risk premium = 27.40% + 6.5% = 33.90%

Since it is assumed that the stock is expected to pay a constant dividend in perpetuity, the dividend can therefore e calculated as follows:

Dividend = Current market price * Current expected rate of return = $74 * 20.2% = $14.95

The new market price of the security can now be calculated as follows:

New market price of the security = Dividend / New discount rate = $14.95 / 33.90% = $44.10

Therefore, the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged) will be $44.10.

Answer from: Quest

The business cycle is the periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real gross domestic product (gdp) and other macroeconomic variables. a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. economists note, however, that complete business cycles vary in length. the duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging six years in length. some business analysts use the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. but the term "business cycle" is still primarily associated with larger (industry-wide, regional, national, or even international) business trends.

Answer from: Quest

the answer is "b.the increased supply will create a surplus. "

the essential thought behind price controls is straightforward - utilize the power of law to modify the equilibrium of a market. for instance, the legislature may choose that the steel business needs to survive, and in this way pass a law to set a value floor on steel. this implies all steel sold must offer at or over the floor value, which must be set over the equilibrium cost for it to have any impact. the switch could likewise happen - the administration can choose that steel is excessively costly and set a value roof underneath its equilibrium value, with the goal that all steel must be sold at or beneath that ceiling.

Another question on Business

Business, 22.06.2019 10:30

What type of budget is stated? a budget is a type of financial report that scrutinizes the inflow and outflow of money in a given financial year.

Answers: 1

Answer

Business, 22.06.2019 13:30

The purpose of safety stock is to: a. eliminate the possibility of a stockout. b. control the likelihood of a stockout due to variable demand and/or lead time. c. eliminate the likelihood of a stockout due to erroneous inventory tally. d. protect the firm from a sudden decrease in demand. e. replace failed units with good ones.

Answers: 1

Answer

Business, 22.06.2019 20:30

(30 total points) suppose a firm’s production function is given by q = l1/2*k1/2. the marginal product of labor and the marginal product of capital are given by: mpl = 1/ 2 1/ 2 2l k , and mpk = 1/ 2 1/ 2 2k l . a) (12 points) if the price of labor is w = 48, and the price of capital is r = 12, how much labor and capital should the firm hire in order to minimize the cost of production if the firm wants to produce output q = 18?

Answers: 1

Answer

Business, 22.06.2019 23:50

Jaguar has full manufacturing costs of their s-type sedan of £22,803. they sell the s-type in the uk with a 20% margin for a price of £27,363. today these cars are available in the us for $55,000 which is the uk price multiplied by the current exchange rate of $2.01/£. jaguar has committed to keeping the us price at $55,000 for the next six months. if the uk pound appreciates against the usd to an exchange rate of $2.15/£, and jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?

Answers: 1

Answer

You know the right answer?

The market price of a security is $74. Its expected rate of return is 20.2%. The risk-free rate is 3...

Questions