Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expectedreturn of the following stocks:-a. Calculate the alpha for each stock in the table.b. At current market prices, which stocks represent buying opportunities? On which stocks should you put a sell order in?a. Calculate the alpha for each stock in the table.Complete the table with the alphas below: (Round to two decimal places.)Green LeafExpected ReturnVolatility12%20%BetaAlpha1.50%%Data table(Click on the following icon in order to copy its contents into a spreadsheet.)Expected ReturnVolatilityBetaGreen Leaf12%20%1.50NatSam10%40%1.80HanBel9%30%0.75Rebecca Automobile6%35%1.20- X

To calculate the alpha of each stock, use the Capital Asset Pricing Model (CAPM). The formula for…

Answered: Assume that the CAPM is a good…

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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Problem 2. Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.00% + 1.10RM + A RB = -0.60% + 0.90RM + eB The R-squared of the estimate for stock A is 0.35 and the R-squared of the estimate for stock B is 0.40. The standard deviation of the market is OM = 30%. Assume you create portfolio P with weights of 120% in A and -20% in B. These weights mean that you go long stock A and short stock B. a) What is the standard deviation of the portfolio? [Hint: R-squared is the variance explained by the market risk B²o divided by the variance in the stock o}.] b) What is the beta of the portfolio? c) What is the firm-specific variance of the portfolio? (Round to 3 decimals.)
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.6% 4.4% 2 0.5 16 27 14 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock? (Round your answers to 2 decimal places.) c. If the T-bill rate is 7%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
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How do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.
2. Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3.5%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks: 1. a. At current market prices, which stocks represent buying opportunities? b. On which stocks should you put a sell order in? Complete the table with the alphas below: (Round to one decimal place.) Expected Return Volatility Beta Alpha Green Leaf 12% 20% 1.50 % NatSam 10% 40% 1.80 % HanBel 9% 30% 0.75 % Rebecca Automobile 6% 35% 1.20 %
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.35 13% 0.25 −7% 0.30 17% 0.25 8% 0.35 21% 0.25 15% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here%. (Round to two decimal places.)
ANSWER EACH PART PLEASE!
Consider the two stocks below. Which has a positive beta (i.e., tends to move in the same direction as the market)? Which has a higher R2 (1.e., market returns explain more of its return patterns)? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Stock 1 has a positive beta and a higher R² a b C d Stock 2 has a positive beta and a higher R² Stock 1 has a positive beta, but Stock 2 has a higher R Stock 2 has a positive beta, but Stock 1 has a higher R² ft RM Stock 2 Stock 1 Par
Your client is considering purchasing stocks. The actual return of one o his choices follows here. Assist him by calculating the standard deviation and advise him what the risk is. Stock 'A' Actual Returns = 6%, 12%, 8%, 10% 0.0164 0.0258 0.0542 0.1072
2) see picture
A. If a stock costs $55 one month and drops to $45 the next month, what is the expected stock price the next month, if we assume the stock follows a random walk? B. Explain both technical and fundamental analysis and what form of the efficient market hypothesis corresponds to each.
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22 Aggressive Stock -3% 35 Defensive Stock 4% 12 Required: a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.

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