7 OF 15 QUESTIONS REMAININGAssume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock isrelatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the followingreturns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolioconsisting of 54% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Do not round your intermediatecalculations.YearECBWCBTime limi60 minute5Attempts2 attemptGradingMaxim40.00%40.00%DescriptionFinal exam will-10.00%15.00%part covers thethat were coverB35.00%-5.00%July 17 at 12:01a-5.00%-10.00%18. No late subrdate, you will no515.00535.00%Average return=15.009515.00%Standard deviation =22.64522.64%A) 3.59%B) 4.27%2.99%(D) 3.99%exam covers maallowed is ONEattempts are allrecorded.

To determine by how much your uncle's risk would be reduced if he held a diversified portfolio of…

Answered: 7 OF 15 QUESTIONS REMAINING Assume that…

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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77. You complete a runs test on daily data for a thinly traded stock and the Z statistic is -5.13. If the stock has a return of -0.33% late in the trading day and you are convinced that other investors are not aware of the results, based on the runs test results, an investor would: Buy or long the stock in late trading. Sell or short the stock in late trading. Wait an additional day to buy the stock. Wait an additional day to short the stock. Take neither a long or short position in the stock. None of the above answers is correct.
Choose one appropriate statement. 1. The movement of stock prices have certain patterns, and investors can make profits by studying such patterns. 2. If a hedge fund manager believes that Toyota will going to outperform Honda she will short stocks of both companies. 3. When one share of Apple stock is being traded at $150, the stock market believes that you can always sell a share of Apple stock for at least $150 in the future. 4. O An undervalued stock should outperform the market in the long run. 5. O Diversification is not appropriate because it would prevent investors from capitalizing on the superior return that can result from a concentrated holding of the stock of one successful company.
Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%. Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage? Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C. Beta / Sensitivity Factor Risk Premium Stock A Stock B Stock C Management Risk 5.5% 1.5 1.1 0.8 Interest Rate Risk 2.0% 0.8 0.5 0.4 Inflation Risk 3.5% 0.5 0.9 0.7
Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…
3. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Falcon Freight Inc. (FF): Five years of realized returns for FF are given in the following table. Remember: 1. While FF was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for FF for 2014 to 2018 are: 2014 2015 2016 2017 2018 Stock return 20.00% 13.60% 24.00% 33.60% 10.40% Given the preceding data, the average realized return on FF’s stock is _______. The preceding data series represents ________ of FF’s historical returns. Based on this conclusion, the standard deviation of FF’s…
5. Last year, Rocket Inc. earned a 19% return. Farmer's Corp. earned 11%. The overall market return last year was 16%, and the risk-free rate was 2%. If Rocket stock has a beta of 1.8 and Farmer's has a beta of 0.5, which stock performed better once you take risk into account? Review Only Click the icon to see the Worked Solution. Rocket's expected return is %. (Enter as a percentage and round to one decimal place.) Farmer's expected return is %. (Enter as a percentage and round to one decimal place.) Which stock performed better once you take risk into account? (Select the best answer below.) A. Given its beta, Rocket should have earned a much higher return than it did (11% vs 19%). Farmer's, on the other hand, earned a higher return than we would have expected (27.2% vs 9.0%). So taking risk into account, Rocket was the better stock. B. Given its beta, Rocket should have earned a much higher return than it did (27.2% vs 19%). Farmer's, on the other hand, earned a higher return than…
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27 - Which of the following statements is CORRECT? Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period. Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move. You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks. If the market risk premium remains constant, but the…
2B) You have $600,000 to invest in the stock market. Suppose you invested one-third of your wealth in stock Q and the rest in stock L. These stocks have the following characteristics: Stock Q has an expected return of 10% and a standard deviation of 7%. Stock L has an expected return of 18% and a standard deviation of 11%. Determine the expected return and standard deviation on a portfolio of stocks Q and L, when the two stocks are uncorrelated and when they are negatively perfectly correlated. Interpret and compare your answers in these two cases.
品 Check my work Consider the following information: Probability of Rate of Return if State Occurs State of Economy Economy Stock A Stock B .050 130 .220 -33 .23 oped Recession .23 Normal .63 Boom .14 .46 Book Hint a. Calculate the expected return for the two stocks. (Do not round interme calculations and enter your answers as a percent rounded to 2 decimal places 32.16.) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places 32.16.) Print a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B Graw **. **** APR 08 F3 F1 F2
a) Assume that the risk free rate of return is 6%, the market expected rate of return is 10%. The standard deviation of the market return is 4% while the covariance of return for security A and the market is 3%. Compute the required rate of return on Security A? b) The Managing Directors of three profitable listed companies discussed their companiesdividend policies at a business lunch.Company A has deliberately paid no dividends for the last five years.Company B always pays a low dividend per share (after adjusting for the general price index) and offer regular bonus issues.Company C always pays a dividend of 50% of earnings after taxation. Each Managing Director is convinced that his company policy is maximizing shareholders wealth.Required:Discuss the dividend policies used by the three companies.
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