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Date Posted: 05:24:52 10/09/00 Mon
Author: Mindy Johnson
Subject: Re: take home quiz
In reply to: Chad 's message, "Re: take home quiz" on 20:05:10 10/08/00 Sun

> > > > > > Question on Answer for take home Quiz for
> Chap
> > 5
> > > #5
> > > > > > and #6. Did anyone else get:
> > > > > >
> > > > > > 5 9.88
> > > > > > 6 22.7
> > > > >
> > > > > I got 9.9% for #5, but am stuck on #6. How did
> > you
> > > > > get 22.7%?
> > > >
> > > > Inflation = 2.8%. I scanned the book and found
> > which
> > > > elements are affected by inflation. Added the
> > > > inflationt to the appropriate elements and got:
> > > >
> > > > Krf = 5.7 + 2.8 = 9.5
> > > > Mrp = 9.2 + 2.8 = 12
> > > > B = 1.1
> > > >
> > > > Ki = 9.5 + 12(1.1)
> > > > = 22.7
> > > >
> > > > Any disagreements?
> > > I added the real riskfree rate and inflation +
> > > (mrp)(beta)
> > > 5.7+2.8+(9.2)(1.1)=18.62
> > >
> > > I wanted to verify the remaining answers can some
> one
> > > respond.
> > > 1. C
> > > 2. B
> > > 3. expected return 8.25 standard dev 10.365
> > > 4. B
> > > 5. 9.89
> > > 6. 18.62
> > > 7. E
> > On #1, I felt like that c was the closest answer,
> > however is market risk constant for all securities in
> > the market?
> > Also, thanks for pointing out my stupid mistakes on
> #6.
> I think market risk is the portion of risk that can
> not be diversified away.

YOU ARE CORRECT, MARKET RISK CANNOT BE DIVERSIFIED AWAY. THE ANSWER TO #1 IS D B/C YOU CANNOT CONTROL MARKET RISK, WHICH IS MEASURED BY BETA (THE SLOPE OF THE SML LINE).

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