Answered

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Suppose that the price of corn is risky, with a beta of .5. The monthly storage cost is $.03, andthe current spot price is $5.50, with an expected spot price in 3 months of $5.88. If the expectedrate of return on the market is 0.9% per month, with a risk-free rate of 0.5% per month, wouldyou store corn for 3 months

Sagot :

Machiko20

Answer

If the expectedrate of return on the market is 0.9% per month, with a risk-free rate of 0.5% per month, wouldyou store corn for 3 months

ogorwyne

Given the risk free rate and the other available data, the decision would be to store corn for 3 months.

How to make to decison on storage

Expected return = 0.9%

expected spot price = $5.88

risk-free rate= 0.5%

monthly storage cost = 0.03

Formula for CAPM = r0 + (rm - rf) β

= 0.5% + (0.9%-0.5%)0.5%

= 0.7%

The expected return can be solved as:

5.5(1+r)³ = 5.88 - 0.03x3

[tex]=( \frac{5.79}{5.5} )^\frac{1}{3} -1[/tex]

= 0.17

The decision to be made here is that since the expected return is more than required rate of return, it would be best to store corn.

Read more on risk free rate here: https://brainly.com/question/26113005

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