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
Section: Chapter Questions
Problem 1PS
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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:MARIMAR
QUESTION 1
The following table provides the rate of returns on IBM and DELL from 2019 to 2023:
Year
Return on IBM
Return on DELL
2019
14
18
2022
2023
2020
12
12
1. Compute Return per Unit of Risk Criterion (RRC) for each stock;
2. Would you invest in IBM or DELL? Why?
P
1
2
3
2021
10
20
QUESTION 2
The following table contains yearly data on theprice of beef ($/Kg) and the quantity demanded
for beef (Kg) from 2021 to 2023:
Year
2021
0
6
4
2
2022
14
12
2023
15
8
Where:
Q: quantity demanded for beef (Lbs);
P: price of beef ($/Lbs).
Consider the following simple linear regression: Q =B₁ + B,P.
1. Use Ordinary Least Squares Method to estimate B and B.;
2. Interpret the slope;
8. Find the prediction line:
4. Compute the coefficient of determination; that is, R²,
5. What would be the effect of a $4 increase in price on quantity demanded?
6. What would be the effect of a $2 decrease in price on quantity demanded?
Note: O is the dependent variable (the Y-axis) and P is the independent variable
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