Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe,but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations andBuildings (WCB). Both companies have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by howmuch would your cousin's risk have been reduced if he had held a portfolio consisting of 40% in ECB and the remainder in WCB? (Hint: Use the samplestandard deviation formula.)Average return=Standard deviation =Select the correct answer.a. 3.68%b. 3.72%c. 3.76%d. 3.84%e. 3.80%YearECBWCB201140.00%40.00%2012-10.00%15.00%201335.00%-5.00%2014-5.00%-10.00%201515.00%35.00%15.00%15.00%22.64%22.64%

Compute risk reduction %; Formulas:

Answered: Assume that your cousin holds just one…

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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Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations and Buildings (WCB). Both companies 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 cousin's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Year ECB WCB 2011 40.00% 40.00% 2012 −10.00% 15.00% 2013 35.00% −5.00% 2014 −5.00% −10.00% 2015 15.00% 35.00% Average return = 15.00% 15.00% Standard deviation = 22.64% 22.64% a. 3.29% b. 3.46% c. 3.65% d. 3.84% e. 4.03%
Silver Industries' Y shares have an expected return of 15%, a beta coefficient of 0.8 and a standard deviation of expected returns of 31%. The company's Z shares have an expected return of 11.3%, a beta coefficient of 1.5 and a standard deviation of 25%. The risk-free rate is 5% and the market risk premium is 4%. a. Determine the coefficient of variation of each stock. b. Explain which stock is more risky for diversified investors. c. Calculate the expected rate of return for both stocks.
Which of the following statements is correct? Multiple Choice Penny stocks are the stocks of small companies that are priced below $1 per share. Restricted stocks are shares of stock issued to executives that have limitations on voting rights. The capital market line graphs the relationship between return and risk (beta). All of these choices are correct.
You ran a regression of the excess return on Walmart's stock on the excess return on the market. You found the following: alpha=1.5%, beta-2.818, R^2=0.623. If Walmart's total volatility was 0.310 in that same period, what must have been the markets volatility in that same period.
Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns 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 portfolio consisting of 73% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Do not round your intermediate calculations. Year 1 2 3 4 5 Average return = Standard deviation = O a. 5.24 p.p. O b. 0.72 p.p. O c. 2.84 p.p. O d. 0.64 p.p. O e. 3.18 p.p. O Icon Key ECB WCB 40.00% 40.00% -10.00% 19.00% 11 35.00% -5.00% -5.00% -10.00% 19.00% 35.00% 15.80% 22.71% 15.80% 22.71%
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.1%. The rate of return on Bpex was only rB = 2.5%. The market today responded to very encouraging news about the unemployment rate, and rM = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as:Apex: rA = .2% + 1.4rM Bpex: rB = −.1% + .6rMOn the basis of these data, which company do you think won the lawsuit?
You were analyzing a stock and came up with the following probability distribution of the stock returns. What is the coefficient of variation on the company's stock?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. State of the Economy Probability of State Occurring Stock's Expected Return Boom 20.00% 21.00% Normal 46.00% 14.60% Recession 34.00% 8.45%
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rд = 3.2%. The rate of return on Bpex was only r = 2.6%. The market today responded to very encouraging news about the unemployment rate, and = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as: Apex: A = 0.5% + 1.6rM Bpex: r = -0.1% +0.4rM a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Apex Bpex Predicted Returns % % b. Which company do you think won the lawsuit? Apex O Bpex
You were analyzing a stock and came up with the following probability distribution of the stock returns. What is the coefficient of variation on the company's stock?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. State of the Economy Probability of State Occurring Stock's Expected Return Boom 20.00% 22.15% Normal 46.00% 17.35% Recession 34.00% 9.50%
An antitrust case has lead to you having to calculate a fair return (using the CAPM) for RadioEthiopea common stock. The risk free rate is 3.20%, while the expected return on the market is 4.70%. The shares have a volatility of 21.00%, while the market has a volatility of 13.00%. The correlation between the two sets of returns is 0.44. What is the fair return for RadioEthiopea common stock?
Jenny has no assets, but she has $1,000 to invest in one of two stocks. Stock A has a beta of 1.2 and a sigma of 0.2. Stock B has a beta of 1.0 and a sigma of 0.3. If the market prices the stocks according to CAPM, which stock should you recommend? " B Neither one A Depends on the correlation between each of these stocks and the market portfolio Indifferent between these stocks please answer asap
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