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That is true. Utility would not be concave anymore under prospect theory (only for gains), but convex for losses, which is evidence against CAPM. CAPM is valid either : -if the utility function is quadratic (which is nonsense in terms of economic interpretation, and in general, Von Neumann- Morgenstern utility describes poorly reality and should be ...


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Unlevered Beta (Beta asset) = Levered Beta / 1+(1-tax) Debt/Equity Similarly , Levered Beta (Beta equity) = Unlevered Beta * 1+ (1-tax) Debt /Equity


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a) The formula for Beta is: $$\beta_i=\frac{\sigma_{i,M}^2}{\sigma_M^2}=\frac{0.165^2}{0.11^2}=2.25$$ b) So by the CAPM equation, the expected return for the asset is: $$E(R_i)=r_f+\beta(R_M-r_f)=0.04+2.25(0.12-0.04)=0.22=22\%$$ c) If the variance of the stock is $0.22^2$, since this variance was multiplied by $\beta=2.25$, we get: ...



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