Puji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8.  Is there a market premium or market discount? Justify your answer. Determine the required return of assets J and K. Show your solutions. Interpret your answer. Graph the Security Market Line for both assets.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Puji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8. 

  1. Is there a market premium or market discount? Justify your answer.
  2. Determine the required return of assets J and K. Show your solutions. Interpret your answer.
  3. Graph the Security Market Line for both assets. 
  4. Between assets J and K, can you determine which has more total risk and which has more market risk?
  5. Determine which stock has a higher cost of equity capital. 
  6. If you are the financial consultant of PIFC, what will be your investment strategy? 
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