Suppose the real risk-free rate is 3.9%, the average future inflation rate is  4.7%, a maturity premium of 0.06% per year to maturity applies, i.e., MRP =  0.06%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 0.7% and a default risk premium of 0.8% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 7-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

You have been scouring The Wall Street Journal looking for stocks that are “good values”  and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 4  percent and the market risk premium (rM – rRF) is 2.7 percent.  Which security would be the best a. Expected Return = 9.01%, Beta = 1.6 b. Expected Return = 7.06%, Beta = 0.1 c. Expected Return = 5.04%, Beta = 0.4 d. Expected Return = 8.74%, Beta = 0.5 e. Expected Return = 11.50%, Beta = 1.5

A stock has an expected return of 16.3 percent.  The beta of the stock is 1.18 and the risk-free rate is 2.7 percent.  What is the market risk premium?

Assume the risk-free rate is 1% and that the required return on the market is 6.4%.   If a stock has a required rate of return of 13.4%, what is its beta?

T. Martell Inc.’s stock has a 24% chance of producing a 12% return, a  24% chance of producing a 8% return, and a 52% chance of producing a  -6% return. What is Martell’s expected return? 

A stock has an expected return of 11.6 percent.  The beta of the stock is 0.86 and the risk-free rate is 3.2 percent.  What is the market risk premium?

You have been scouring The Wall Street Journal looking for stocks that are “good values”  and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 4  percent and the market risk premium (rM – rRF) is 2.7 percent.  Which security would be the best a. Expected Return = 9.01%, Beta = 1.6 b. Expected Return = 7.06%, Beta = 0.1 c. Expected Return = 5.04%, Beta = 0.4 d. Expected Return = 8.74%, Beta = 0.5 e. Expected Return = 11.50%, Beta = 1.5

Drongo Corporation’s 3-year bonds currently yield 4.7 percent and have an inflation premium  of 2%.  The real risk-free rate of interest, r*, is 1.3 percent and is assumed to be constant.   The maturity risk premium (MRP) is estimated to be 0.1%(t – 1), where t is equal to the time to  maturity.  The default risk and liquidity premiums for this company’s bonds total 1.2 percent and are believed to be the same for all bonds issued by this company.  If the average inflation  rate is expected to be 5.4 percent for years 4, 5, and 6, what is the yield on a 6-year bond for  Drongo Corporation?

The real risk-free rate of interest is 1 percent.  Inflation is expected to be 2 percent this  coming year, jump to 4 percent next year, and increase to 5 percent the year after (Year 3).   According to the expectations theory, what should be the interest rate on 1-year, risk-free  securities today?

Suppose the interest rate on a 1-year T-bond is 3% and that on a 3-year  T-bill is 3.4%.  Assuming the pure expectations theory is correct, what is the  market’s forecast for 2-year rates 1 year from now?