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Question: The current market price of a security is $50, the security's expected return is 15%,...

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Finance

Question: The current market price of a security is $50, thesecurity's expected return is 15%, the riskless rate of interest is2%, and the market risk premium is 8%.

a. What is the beta of the security?

b. What is the covariance of returns on this security with thereturns on the market portfolio?

c. What will be the security's price, if the covariance of itsrate of return with the market portfolio doubles?

d. How is your result consistent with our understanding thatassets with higher systematic risks must pay higher returns onaverage? Please use formulas so I understand.

Answer & Explanation Solved by verified expert
3.9 Ratings (627 Votes)
Current Market price of the security 50 Security Expected return ERi 15 Riskfree rate Rf 2 Market Risk Premium RMRf 8 a CAPM Equation ERi Rf iRM Rf 15 2 i 8 i 178 2125 Therefore Beta of the stock 2125 b Below is the formula for beta of    See Answer
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Question: The current market price of a security is $50, thesecurity's expected return is 15%, the riskless rate of interest is2%, and the market risk premium is 8%.a. What is the beta of the security?b. What is the covariance of returns on this security with thereturns on the market portfolio?c. What will be the security's price, if the covariance of itsrate of return with the market portfolio doubles?d. How is your result consistent with our understanding thatassets with higher systematic risks must pay higher returns onaverage? Please use formulas so I understand.

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