Suppose the real risk-free rate is 3.9%, the average future…

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 s…

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