Accounting assignment numericals: Numericals of characteristics of two securities

1.         Consider the following information about the characteristics of two securities, A and B; the market portfolio, M; and the risk-free rate of return:Security           (Ri, RM)       (Ri)

A                     0.5                   0.4

B                     0.7                   0.8

E(RM) = 0.25              (RM) = 0.75             RF = 0.06

(Ri, RM) denotes the correlation between the returns on security i and the returns on the market portfolio; (Ri) denotes the standard deviation of the returns on security i, E(RM) denotes the expected return on the market portfolio; (RM) denotes the standard deviation of the returns on the market portfolio; and RF denotes the risk-free rate of return.

(a)        Calculate i (beta) for each of the following:

(i)         Security A

(ii)        Security B

(a)        Use

where,

(i)         cov(RA, RM) = = 0.15

(ii)        cov(RB, RM) = = 0.42

(b)        According to the Capital Asset Pricing Model (CAPM), what are the expected returns for securities A and B?(b)        Use E(Ri) = RF + bi[E(RM) – RF]

E(RA) = 0.06 + .267[0.25- 0.06] = 0.11073

E(RB) = 0.06 + 0.747[0.25- 0.06] = 0.20193

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