1. CAPM and Valuation. You are a consultant to a firm evaluating an
expansion of its current business. The cash-flow forecasts (in
millions of dollars) for the project are:
Years    Cash Flow
  0         ?100
 1?10       + 15
Based on the behavior of the firm?s stock, you believe that the beta
of the firm is 1.4. Assuming that the rate of return available on
risk-free investments is 4 percent and that the expected rate of
return on the market portfolio is 12 percent, what is the net present
value of the project?

2. CAPM and Valuation. A share of stock with a beta of .75 now sells
for $50. Investors expect the stock to pay a year-end dividend of $2.
The T-bill rate is 4 percent, and the market risk premium is 8
percent. If the stock is perceived to be fairly priced today, what
must be investors? expectation of the price of the stock at the end of
the year?


3. Portfolio Risk and Return. Suppose that the S&P 500, with a beta of
1.0, has an expected return of 13 percent and T-bills provide a
risk-free return of 5 percent.
a. What would be the expected return and beta of portfolios
constructed from these two assets with weights in the S&P 500 of (i)
0; (ii) .25; (iii) .5; (iv) .75; (v) 1.0?
b. Based on your answer to (a), what is the trade-off between risk and
return, that is, how does expected return vary with beta?
c. What does your answer to (b) have to do with the security market
line relationship?

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Request for Question Clarification by livioflores-ga on 04 Jun 2005 09:46 PDT

hi!!

Could you clarify the last question #3, which are the referred two assets?

If you cannot clarify that do you accept as an answer a solution for
the two first problems?

Thank you,
livioflores-ga

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Clarification of Question by buffcode-ga on 04 Jun 2005 19:19 PDT

I cannot clarify the question because I don't understand it in the
first place!  I posted the question in its entirety, so there is no
missing information.  I would prefer to have all 3 questions answered,
rather than just two. Thanks for your help!

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Request for Question Clarification by livioflores-ga on 04 Jun 2005 20:03 PDT

In that case I suggest you to close this question and split it in 3
separated ones pricing each one at the price that you consider fair,
doing that you will increase the chances to get answers and will pay
proportionaly to the answers received. Note that if no one can
understand your third problem you will not get answer for the first
two, we cannot post partial answers without your consent.


Regards
livioflores-ga

The 3rd question refers to two assets; the S&P 500 index asset and a
T-bill risk free asset. The portfolio it refers to is (i) 100%
t-bills, (ii) 75% t-bills and 25% S&P500 index, (iii) 50% t-bills and
50% S&P 500, and (iv) 100% S&P 500 index.
The risk and return of the protfolio is the wieghted average of
expected returns and risk. (note: beta of S&P 500 is 1 and the beta of
the t-bills is 0)

There will be a linear relationship between the risk versus return
which is the same as the security market line.