LOS e, (Part 1): Explain the components of an investor's required rate of return (i.e., the real risk-free rate, the expected rate of inflation, and a risk premium).
Given the following information, what is the required rate of return on Bin Co?
inflation premium = 3%
real risk-free rate = 2%
Bin Co. beta = 1.3
market risk premium = 4%
A)
7.6%.
B)
10.2%.
C)
16.7%.
Use the capital asset pricing model (CAPM) to find the required rate of return. The approximate risk-free rate of interest is 5% (2% real risk-free rate + 3% inflation premium).
If the risk-free rate is 5%, the market rate is 12%, and the beta of a stock is 0.5, what would happen to the required rate of return if the inflation premium increased by 2%? It would:
If expected inflation increases, all else equal, the:
A)
nominal risk-free rate will decrease.
B)
real market risk premium will increase.
C)
nominal risk-free rate will increase.
The nominal risk free rate is a function of the real risk-free rate and expected inflation: Nominal risk free rate = (1 + real risk-free rate)(1 + expected inflation) – 1 If expected inflation increases, but the real risk-free rate stays the same, the nominal risk-free rate will increase.
The real risk-free rate is approximately equal to:
A)
the ratio of the nominal risk-free rate to the real expected market risk premium.
B)
the nominal risk-free rate minus expected inflation.
C)
the nominal risk-free rate plus expected inflation.
The nominal risk free rate is a function of the real risk-free rate and expected inflation: nominal risk free rate = (1 + real risk-free rate)(1 + expected inflation) – 1 @ real risk-free rate + expected inflation
Therefore the real risk-free rate is approximately equal to: nominal risk-free rate – expected inflation.
The nominal risk-free rate is a function of the real risk-free rate and:
A)
the nominal expected market risk premium.
B)
expected inflation.
C)
the real expected market risk premium.
The nominal risk-free rate is a function of the real risk-free rate and expected inflation: nominal risk free rate = (1 + real risk-free rate)(1 + expected inflation) – 1
one plus the real risk-free rate times one plus expected inflation, minus one.
B)
one plus the real risk-free rate times one plus expected inflation.
C)
the real risk-free rate minus expected inflation.
The nominal risk-free rate is a function of the real risk-free rate and expected inflation: nominal risk free rate = (1 + real risk-free rate)(1 + expected inflation) – 1 Note that the nominal rate is frequently estimated by summing the real rate and the rate of expected inflation.
LOS e, (Part 2): Discuss the risk factors to be assessed in determining an equity risk premium for use in estimating the required return for the investment in each country.
The equity risk premium for investing in foreign securities considers which of the following types of risk:
A)
company-specific risk.
B)
interest rate risk.
C)
exchange rate risk.
The equity risk premium for foreign investments includes business, financial, liquidity, exchange rate, and country risk.
发表于 2010-4-22 22:33
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