Answer to Question #111116 in Economics of Enterprise for Paige Connor

Question

(a) Given the following information, determine which asset gives the best investment opportunity based on the calculated rate of return on asset? Show all calculations.
Risk Free Rate = 4.5%
Market Rate of Return = 7%

Table 7.1
Stock Beta Value
ECoin Investment LLC -0.2
Green Energy Inc. 1.0
Non Fossil Corp. 1.3
IoT Software Ltd. 0

(b) (i) How does the rate of return on these four companies stock compare to the market rate and the risk-free rate?
(ii) Which of the investments you might opt not to invest but instead purchase government bonds? Give reasons.
(iii) What can you deduce about the relationship between the return on an asset and the market rate or free interest rate when beta of the asset is 1 and 0 respectively?

Answer 1

a). Non Fossil Corp. 1.3

=$(1.3/2)$ *7%=3.64%

b).i. The higher the market rate the lower the risk-free rate.

ii. IoT Software Ltd. 0 . It has zero market rate and no risk-free rate.

iii.The market rate of an asset is inversely related to the risk-free rate.