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Week 4 – Assignment: Examine the Risk Relation between Risk and Return
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Write an assessment in which you address the following problems/questions:
- Assess how diversification benefits the investor. Can you imagine circumstances where an investor would not want to diversify? Then explain why or why not.
- Analyze the formulation of the Capital Asset Pricing Model, including the definition of the model with identification of each component. Explain how the CAPM development effectively makes use of the diversification as a foundation for the development of the model. Discuss the uses of the Capital Asset Pricing Model within finance.
- Develop the Capital Asset Pricing Model using the assumptions that the risk-free rate is 3%, the expected return on the market is 8%, and the relevant beta is 1.05.
- Use problem 3 to develop the alternative solutions presented within a table for the assumptions that the beta is 0.75, 1.05, and 1.75 as well as the assumption that the risk free rate is 1%, 3%, and 6.5%.
- Develop a valuation model for a common stock assuming that a company just paid a dividend of $1.75 per share. It’s assumed that the dividend will grow at a constant rate of 6% per year forever. The risk-free rate is 6% with an expected return on the market of 12% and a beta of 1.1. Show each step in generating the resulting valuation.
- Use your analysis of question 5 above to form a table that shows all combinations for the model with the growth rate at 2%, 6%, and 9% and the beta at 0.75, 1.1, and 1.8. Explain why your generated results make financial sense.
Support your paper with at least three resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.
Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral University’s Academic Integrity Policy.
Length: 5-7 pages (not including title and reference pages)