[discussion_vu] mgt201 gdb idea sol by Hafiz Salman bhai and Asad Munir bhai

Here is Idea Solution..by hafiz bhai

Question#1 Answer
Required rate of return for A
Rce = rRF + (rM – rRF) (beta)
Rce = 0.08 + (0.095 – 0.08)(0.95)
Rce = 0.08+(0.015)(0.95)
Rce = 0.08 + 0.01425
Rce = 0.09425 *100
Rce = 9.425%

Required rate of return for B
Rce = rRF + (rM – rRF) (beta)
Rce = 0.08 + (0.095 – 0.08)(1.25)
Rce = 0.08+(0.015)(1.25)
Rce = 0.08 + 0.01875
Rce = 0.09875 *100
Rce = 9.875%

[b]Question#2 Answer
A risk loving person will buy if OR > 1 or = 1, but he might also buy when OR is < 1.

As Ahmad is Risk Lover he will like to invest in Stock B because it has Beta More Than 1 as 1.25[/b]

Question#3 Answer

A risk averse person will not buy if OR < 1. He will also not buy if OR = 1. He might also not decide to buy if OR > 1.

As Shahzad is risk averse so he will invest in Stock A because it has Beta Less Than 1 as 0.95

Solution By Asad Munir....according to me its 100% correct...

Market Premium is nothing but a kind of reward which is offered by the market for taking extra risk in the market for the participant. Market Premium is a difference of Expected Market Return and Risk-Free Rate .
Market Premium = Expected Market Return - Risk-Free Rate
Question#1 Answer
Required rate of return for A
Rce = rRF + (rM – rRF) (beta)
Rce = 0.08 + (0.095)(0.95)
Rce = 0.08+0.09025
Rce = 0.17025x100
Rce = 17.025%

Required rate of return for B
Rce = rRF + (rM – rRF) (beta)
Rce = 0.08 + (0.095)(1.25)
Rce = 0.08+0.11875
Rce = 0.19875x100
Rce = 19.875%

Q 2.
Ahamad will invest in Stock B

Q.3
Shahzad will invest in Stock A

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