Excercise VI

Question 1

expected return on a risky asset

Answer 1

E(Rf) = Rf + beta • [E(Rm) - Rf]

E(Ri) = expected return on risky asset i
Rf = return on a risk-free asset
E(Rm) = expected return on the stock market
Beta = measure of risk of asset i (Company risk factor) with beta = cov (Ri,Rm) / Var(Rm)

Question 2

beta i

Answer 2

= cov ( Rm, Ra) / var(Rm)

b=1 company is as risky as the market
b>1 c. is riskier
b<1 c. is less riskier

Question 3

var(Rm)

Answer 3

= [➕ (Rm^t - R(average)m)^2 ] / T- 1

➕= Summenzeichen startet bei t=1, fortlaufend bis T

Question 4

cov(Ra, Rm)

Answer 4

= [➕ (Rm^t - R(average)m) • ((Ra^t - R(average)a] / T- 1

➕= Summenzeichen startet bei t=1, fortlaufend bis T

Question 5

Comparables approach

Answer 5

1) unleverage ß -> ßu = ßL / 1+(1-t) •[D/E]
2) calculate the mean ß(average)
3) releverage ß(average)m -> ßL=ßu • [1+(1-t) • (D/E)]