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Old 07-12-2018, 01:39 AM
eastla_student eastla_student is offline
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Default ASM IFM Exercise 6.7

Exercise 6.7 poses a series of three conceptual statements and we identify which are true, assuming CAPM holds

We are told a firm's shares are expected to be priced at 40 a year from now, the beta is less than 1. We are also given the market rate of return and the risk-free rate.

The statement I have a question about is the following

III If the risk-free asset rate of return increases, the current price of the stock decreases.

I believe I understand why it is true, but in the answer it is stated:

If the risk free rate increases, then the return on the stock, which is the risk-free rate plus the market premium, must also increase, making the starting price lower.

Shouldn't it say: which is the risk-free rate plus beta times the market premium ?
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Old 07-12-2018, 07:31 AM
Abraham Weishaus Abraham Weishaus is offline
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Yes. Thanks for pointing out the error.
Incidentally, it is exercise 6.8.
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