Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 41%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.3%, and one-half have an alpha of -4.3%. The analyst then buys $1.3 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.3 million of an equally weighted portfolio of the negative-alpha stocks. Required: a. What is the expected profit (in dollars), and what is the standard deviation of the analyst's profit? (Enter your answers in dollars now in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.). Expected profit Standard deviation b-1. How does your answer for standard deviation change if the analyst examines 50 stocks instead of 20? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Standard deviation

Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 41%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.3%, and one-half have an alpha of -4.3%. The analyst then buys $1.3 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.3 million of an equally weighted portfolio of the negative-alpha stocks. Required: a. What is the expected profit (in dollars), and what is the standard deviation of the analyst's profit? (Enter your answers in dollars now in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.). Expected profit Standard deviation b-1. How does your answer for standard deviation change if the analyst examines 50 stocks instead of 20? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Standard deviation

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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Two stocks, A and B, have beta coefficients of 1.0 and 0.4, respectively. If the expected return on the market is 9 percent and the risk-free rate is 6 percent, what is the risk premium associated with each stock? Round your answers to two decimal places. The risk premium for stock A: The risk premium for stock B: % %
Suppose the risk-free return is 2.5% and the market portfolio has an expected returnof 6.2% and a volatility (measured as standard deviation) of 14%. A stock has a 20%volatility and a correlation with the market of 0.6. Calculate and explain the beta ofthe stock with respect to the market.
Assume that expected return of the stock A in your portfolio is 14.6%. The risk premium on the stocks of the same industry are 5.8%, the risk-free rate of return is 5.9% and the inflation rate was 2.7. Calculate beta of thisstock using Capital Asset Pricing Model(CAPM)
Suppose the risk-free return is 5.3% and the market portfolio has an expected return of 10.2% and a standard deviation of 16%. Loblaw Companies Limited stock has a beta of 0.32. What is its expected return? The expected return is%. (Enter your response as a percent rounded to two decimal places.)
Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM )is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%,and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%,and -10%, respectively. Compute the beta and expected return of portfolio 2.
Suppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereas stock B has a volatility of 68% and a beta of 0.75. (a) Which stock has more total risk? (b) Which stock has more market risk? (c) Suppose the risk-free rate is 2% and you estimatethe market’s expected return as 10%. Which firm has a higher cost of equity capital?
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information: Stock A Beta 1.33 Expected Return 12% Stock B Beta 0.7 Expected Return 10% (a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words] (b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively. (please show me steps and round the final answer to 2 decimal places, thanks)
Suppose the risk-free return is 3.7% and the market portfolio has an expected return of 8.8% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.73. What is its expected return (Round to 2 decimal places)
Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 31%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 2.0%, and one-half have an alpha of –2.0%. The analyst then buys $1.1 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.1 million of an equally weighted portfolio of the negative-alpha stocks. Required: a. What is the expected profit (in dollars), and what is the standard deviation of the analyst’s profit? (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. b-1. How does your answer for standard deviation change if the analyst examines 50 stocks instead of 20?
In an economy where the risk-free interest rate is 19% and the expected return of the market is 25%, the beta coefficients of A, B, C and D stocks and the expected returns announced by the companies are as follows. According to the Financial (Capital) Assets Pricing Model c) Calculate the expected return rates of the shares.d) Determine which stocks can be invested by comparing the expected return announced by the company with the expected return you calculated.
We know that two stocks A and B are correctly priced by the CAPM model. For A, the expected return is 12%, and the beta is 1.5; for B, the expected return is 6%, and the beta is 0.5. Based on this information, what is the risk free rate and expected market return? Select one: A. 3%; 9% B. 3%; 6% C. 2%; 8% D. 4%; 10%
Consider two types of assets: market portfolio (M) and stock A. The expected return is 8% and standard deviation of the market portfolio is 15%. The risk-free rate is 2%. The standard deviation of market portfolio returns is 15%. The standard deviation of stock A is 30%, and the beta coefficient is 1. Draw the capital market line and show the position of stock A.

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