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(a) What is the expected annual return on Caterpillar if it has a beta of 0.90; the annual one-year Treasury bill rate is 2.24%%; and the expected return on the Standard & Poor’s 500 is 8%? Also, please explain, in a few sentences, the intuition behind your result (i.e., the relationship between beta and expected return).

(b) In the above problem, if the twenty-year bond interest rate increases to 6.88%, what is the percentage change in the price of the bond? Please briefly explain why the price changed the way it did.

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Financial Management, Finance

Category:- Financial Management
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