Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

1) Market price of the security is= $20. Its expected rate of return is= 10%. Risk free rate is= 2% and expected excess return on market portfolio is= 6%. What will be market price of security if correlation coefficient with market portfolio doubles (and all other variables remain unchanged)? Suppose that stock is expected to pay the constant dividend in perpetuity, and that CAPM holds.

To reply this problem, let us go through the steps given below.

i) Consider security before correlation coefficient doubles. Given price, expected return (discount rate) and fact that G = 0, determine the expected dividend payments for this security?

ii) What was the security’s beta before the change in the correlation coefficient?

iii) What occurs to beta when correlation coefficient doubles?

iv) What occurs to expected excess return of security? What will be the new expected total return of the security?

v) By using Gordon model, the fact which dividends are constant, and your result from part d) about expected return (that is, the discount rate), determine the new market price of security? In which direction did stock price change? describe why?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914827

Have any Question? 


Related Questions in Basic Finance

Suppose your company imports computer motherboards from

Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 21.1. You have just placed an order for 30,000 motherboards at a cost to you of 233.5 Singapore dollars each. You wi ...

1 is the presentation of a personal income statement

1. Is the presentation of a personal income statement appropriate? 2. GAAP as they apply to personal financial statements use the cash basis. Comment. 3. Is the concept of working capital used with personal financial sta ...

1 oil and gas companies must disclose quantity estimates

1. Oil and gas companies must disclose quantity estimates for proved oil and gas reserves and the major factors causing changes in these resource estimates. Briefly indicate why this disclosure can be significant. 2. For ...

Create a customized slide templateyou are the owner of a

Create a customized slide template. You are the owner of a mid-sized insurance company. You have 25 agents who travel throughout the country, making presentations to small groups of people (10 to 20) regarding retirement ...

1 suppose that a company is expected to pay a dividend per

1. Suppose that a company is expected to pay a dividend per share of $20 per year forever. If investors require a 10% rate of return to invest in this stock, what is its price? 2. Suppose that a friend has started a busi ...

1 compare and contrast manufacturing and geographic

1. Compare and contrast manufacturing and geographic postponement. 2. Define and illustrate cash-to-cash conversion, dwell time minimization, and cash spin. How do supply chain strategy and structure impact each? 3. Disc ...

What rate of return do investors require on general

What rate of return do investors require on General Electric (ticker: U:GE) common stock? Use the annual dividends per share reported for the last fi ve years to determine the compound annual growth rate in dividends. As ...

1 an article in a financial publication observes the higher

1. An article in a financial publication observes: "The higher the expected volatility in stock prices, the higher the prices of put and call options will be." Briefly explain the reasoning behind this observation. 2. An ...

1 what is a factorial design why are factorial designs used

1. What is a factorial design? Why are factorial designs used more frequently than one-way designs? 2. How many independent variables are involved in a 3 x 3 factorial design? How many levels are there of each variable? ...

1 describe the basic types of regional trade agreements

1. Describe the basic types of regional trade agreements. Discuss some of the advantages and disadvantages of MNCs doing business in each type. 2. Discuss some of the implications (costs and benefits) of a common currenc ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro