4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of astock with beta value of 1.7 must beA) less than 12 percent.B) 12 percent.C) greater than 12 percent.D) The answer cannot be determined.5) Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporatetax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of itsdebt level according to the relation: PV of financial distress = 800,000 × (D/V*)². What is thefirm's levered value if it issues $200,000 of perpetual debt to buy back stock?A) $792,000.B) $869,555.C) $920,000.D) $350,000.6) The statement that stock prices follow a random walk implies thatI) successive price changes are independent of each other;II) successive price changes are positively related;III) successive price changes are negatively related;IV) the autocorrelation coefficient is either +1.0 or –1.0A) I onlyB) II and III onlyC) IV onlyD) III only

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4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

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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A stock's risk premium is equal to the: expected market risk premium times beta. expected market risk premium multiplied by beta plus the risk-free return. Risk-free return plus expected market return. expected market return times beta.
5. Suppose that you have a stock with a market beta of zero. This means that (A) the stock has no risk for an investor when held alone.(B) the stock adds no risk when held in a market portfolio.(C) the stock ́s returns must have a standard deviation of zero.(D) the expected return on this stock must be zero or negative.(E) this stock ́s returns must be uncorrelated with the market returns.
If a stock's expected return plots on or above the SML, then the stock's return is SML, the stock's return is to compensate the investor for risk. cent to compensate the investor for risk. If a stock's expected return plots below the The SML line can change due to expected Inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): Tar 4%; 10 % ; RPM 6%, and beta - 1.1 What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. -75 % If inflation…
A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Market expected return %
Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 4 percent and the expected return for the market is 17 percent. STOCK BETA A 0.63 B 0.95 C 1.48 a. Using the CAPM, the required rate of return for stock A is B.Using the CAPM, the required rate of return for stock b is C.Using the CAPM, the required rate of return for stock C is (Round to two decimal places.)
2C) Assume that the CAPM holds in the economy. The following data is available about the market portfolio, the riskless rate, and two risky assets, W and X: The market portfolio has a standard deviation equals to 10%, stock W has an expected return equals to 16%, standard deviation equals to 12%, and beta equals to one, stock X has a standard deviation equals to 6% and beta equals to 0.7. The risk-free rate is 3%. What is the expected return and the beta of the market portfolio? What is the expected return on asset X? Does asset W lie on the Capital Market Line? Explain why or why not. Suppose you invested $100,000 in these two stocks. The beta of your portfolio is 1.25. How much did you invest in each stock? What is the expected return of this portfolio?
Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity. 2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option. 3. When the exercise price increases, option prices increase. 4. As the risk-free rate increases, the value of the option increases.
A 243.
Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT? a. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase. b. If both expected inflation and the market risk premium (rM – rRF) increase, the required returns of both stocks will increase by the same amount. c. Since the market is in equilibrium, the required returns of the two stocks should be the same. d. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase. e. If both expected inflation and the market risk premium (rM – rRF) increase, the required return on Stock HB will increase by…
What is the risk premium for Stock C, given it has a beta of 2, and the market risk premium of 12%. (Answer as a whole percentage. i.e. 5.25%, not 0.0525)
A stock has a beta of 1.4 and an expected return of 12.7 percent. If the risk-free rate is 4.9 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Market risk premium
Which of the following statement is true? (a) Correlation has no effect on the expected return of a portfolio. (b) As the correlation between two stocks increases, the volatility of the two-stock portfolio falls. (c) The correlation of a stock's return with itself is zero. (d) None of the above

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