A stock's returns have the following distribution: Demand for the Company's Products Probability of this Demand Occurring Rate of Return if this Demand Occurs Weak 0.1 (48%) Below average 0.1 (15) Average 0.3 14 Above average 0.3 28 Strong 0.2 62 1.0 Assume the risk - free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:

A stock's returns have the following distribution: Demand for the Company's Products Probability of this Demand Occurring Rate of Return if this Demand Occurs Weak 0.1 (48%) Below average 0.1 (15) Average 0.3 14 Above average 0.3 28 Strong 0.2 62 1.0 Assume the risk - free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:

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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Consider the following information on Stocks I and II: Probability of State of Economy State of Economy Rate of Return if State Occurs Stock I Stock II Recession .22 .045 -.37 Normal .62 .355 .29 Irrational .16 exuberance .215 .47 The market risk premium is 11.7 percent, and the risk-free rate is 4.7 percent. a. Calculate the beta and standard deviation of Stock I. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. b. Calculate the beta and standard deviation of Stock II. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskier"? a. Beta Standard deviation b. Beta Standard deviation c. Most systematic risk d. Most unsystematic risk e. "Riskier" stock 1.94 % %
Compute the abnormal rates of return for the following stocks assuming the following systematic risk measures (betas): Rit = return for stock i during period t Rmt = return for the aggregate market during period t Bi = beta for stock i Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBt: ARFt: ARTt: ARct: ARET: % % % % Stock B F T C E % Rit 10.1% 9.4 13.2 11.2 15.1 Rmt 3.9% 8.5 10.0 15.6 11.2 Bi 1.00 1.10 1.45 0.65 -0.40
A stock's returns have the following distribution: Demand for theCompany's Products Probability of thisDemand Occurring Rate of Return ifthis Demand Occurs Weak 0.1 (22%) Below average 0.2 (13) Average 0.3 17 Above average 0.3 39 Strong 0.1 64 1.0 Assume the risk-free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:
Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
A stock's returns have the following distribution: Demand for theCompany's Products Probability of ThisDemand Occurring Rate of Return IfThis Demand Occurs Weak 0.1 (48%) Below average 0.1 (15) Average 0.3 11 Above average 0.3 40 Strong 0.2 65 1.0 Assume the risk-free rate is 4%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:
Stocks A and B have the following probability distributions of expected future returns: a. Calculate the expected rate of return, B, for Stock B (A = 12.50%.) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, GA, for Stock A (σ = 20.90%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? I. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. II. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. III. If Stock B is less highly correlated with…
You've estimated the following expected returns for a stock, depending on the strength of the economy: State (s) Probability Expected return Recession 0.1 -0.05 Normal 0.5 0.06 Expansion 0.4 0.11 What is the expected return for the stock? What is the standard deviation of returns for the stock?
Consider the following information about Stocks I and II: Rate of Return if State Occurs Probability of State of State of Economy Recession Economy Stock I Stock Il .25 .06 -.30 Normal .45 .18 .06 Irrational exuberance .30 .12 .45 The market risk premium is 8 percent, and the risk-free rate is 6 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) The standard deviation on Stock I's return is deviation on Stock II's return is stock's systematic risk/beta, Stock percent, and the Stock I beta is percent, and the Stock II beta is . The standar Therefore, based on the is "riskier".
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…
Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated. The risk-free rate is 5.50%. Stock A B C Expected Return 10.00% 10.90% 11.80% Standard Deviation 15% 15% 15% Beta 1.5 1.8 2.1 Let , be the expected return of stock i, ra represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return. Using SML equation, you can solve for the market risk premium which, in this case, equals approximately The beta for Fund P is approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. You have the market risk premium, the beta for Fund P, and the risk-free rate. Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. This information implies that the required rate of return for Fund P is approximately Which of the following is the reason why the…
A stock's returns have the following distribution: Standard deviation: Coefficient of variation: Sharpe ratio: % Demand for the Company's Products Weak Below average % Average Above average Strong Probability of this Demand Occurring Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: 0.1 0.1 0.4 0.3 0.1 1.0 Rate of Return if this Demand Occurs (38%) (11) 15 23 56
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…

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