An investor is considering whether to invest in shares of Stock ABC or risk-free bond The stock pays dividends continuously at a rate of 1%, has an expected annual yield 9%, and has a volatility of 24%. The continuously compounded risk-free rate is 1.8% Assuming that prices for Stock ABC follow a lognormal distribution, calculate the probability that an investment of X in Stock ABC would be worth less than an investment of X in risk-free bonds after 5 years. [DM_05c_02]

An investor is considering whether to invest in shares of Stock ABC or risk-free bond The stock pays dividends continuously at a rate of 1%, has an expected annual yield 9%, and has a volatility of 24%. The continuously compounded risk-free rate is 1.8% Assuming that prices for Stock ABC follow a lognormal distribution, calculate the probability that an investment of X in Stock ABC would be worth less than an investment of X in risk-free bonds after 5 years. [DM_05c_02]

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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Similar questions

A stock has an expected return of 9.9 percent, the risk-free rate is 1.8 percent, and the market risk premium is 4.3 percent. What must the beta of this stock be?
You are examining three different shares. Share A has expected return 8.00%, beta 0.74, and volatility 31.00%. Share B has expected return 5.40%, beta 0.45, and volatility 13.00%. Finally, share C has expected return 7.20%, beta 0.56, and volatility 27.00%. The risk free rate is 2.70%, while the market price of risk is 7.60%. According to the CAPM, which share is undervalued?
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Stock Expected Return Standard Deviation A 8% 55% B 4% 45% Correlation = −1 Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a “synthetic” risk-free asset?) (Round your answer to 2 decimal places.) b. Could the equilibrium rƒ be greater than rate of return?
You are examining three different shares. Share A has expected return -0.30%, beta -0.49, and volatility 29.00%. Share B has expected return 9.80%, beta 1.09, and volatility 24.00%. Finally, share C has expected return 8.60%, beta 0.88, and volatility 13.00%. The risk free rate is 2.70%, while the market price of risk is 7.00%. According to the CAPM, which share is undervalued?
Stock A has an expected return of 13.52 percent. Stock B has an expected return of 9.24 percent. Assuming the Capital Asset Pricing Model holds, and Stock A's beta is greater than Stock B's beta by 0.32, what is the expected market risk premium (in percent)? Answer to two decimals
A stock has an expected return of 18.00%. The risk-free rate is 1.45% and the market risk premium is 9.30%. What is the β of the stock?
Suppose Target's stock has an expected return of 25% and a volatility of 42%, Hershey's stock has an expected return of 12% and a volatility of 27%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 18.5% and a volatility of 28%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? The expected return is %. (Round to two decimal place.) The volatility is %. (Round to two decimal place.) Consider a new stock with an expected return of 18.5% and a volatility of 28%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this…
Suppose securities A, B, and C have the following expected return and risk. Stock Expected return Risk A 8% 6% B 7% 9% C 13% 9% What is the coefficient of variation for stock A?
Assume that the risk-free rate is 2.8 percent, and that the market risk premium is 4.8 percent. If a stock has a required rate of return of 16.1 percent, what is its beta? Your Answer: Answer
1. Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .8 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are ____ and ____ percent, respectively. Since the SML reward-to-risk is ____ percent, Stock Y is ____(undervalued/ overvalued) and Stock Z is ____(undervalued/ overvalued).
You are examining three different shares. Share A has expected return 8.40%, beta 1.46, and volatility 27.00%. Share B has expected return 1.40%, beta -0.04, and volatility 33.00%. Finally, share C has expected return 5.90%, beta 1.00, and volatility 14.00%. The risk free rate is 1.30%, while the market price of risk is 5.10%. According to the CAPM, which share is undervalued? A B C None of the shares is undervalued
An investor aims to build a portfolio with annual return equal to 8.88%. In the market only two stocks (A and B) are available, with annual historical returns equal to 9.6% and 7.8% respectively. Assume future returns have the same distribution of past returns. What is the percentage of funds that the investor must allocate to the stock A and B?

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