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 Aggressive Stock Defensive Stock Return 6% 22 -3% 35 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%.

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 Aggressive Stock Defensive Stock Return 6% 22 -3% 35 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%.

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

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return 68 20 Aggressive Stock 2.0% 32 Defensive Stock 5.0% 15 a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A Beta D b. What is the expected rate of return on each stock if the market return is equally likely to be 6% or 20% ? (Round your answers to 2 decimal places.) Rate of return on A Rate of return on D
Suppose that stocks are exposed to systematic risks only so that stock i has the following return structure: Ri,t = mį + Si,t where mi is the average return, and si,t is the systematic risk. When we construct a portfolio including more and more stocks, which of the following would happen? The portfolio volatility gradually decreases and eventually converges to a certain positive value. ● The portfolio volatility gradually decreases and eventually converges to zero. The portfolio volatility stays unchanged.
Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock expected return standard deviation A 14% 6% B 18 10 CORRELATION = -1 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Bust Boom Market -7% 19 Rate of Return Aggressive Stock A -10% 25 Defensive Stock D -5% 15 Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)? > Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Find the beta of each stock. Note: Round your answers to 2 decimal places. Beta Stock A Stock D 3.31 x 1.54
Consider the following table, which gives a security analyst's expected return on two stacks and the market i Aggressive Defensive Scenario Probability Market Return Stack Stock 1 0.5 0.5 2.6% 4.4% 16 27 Required: a. What are the belas of the two storks? (Round your answers to 2 decimal places.) Beta A Beta D b. What is the expected rate of return on each stack? (Round your answers to 2 decimal places.) Rate of return on A Rata of return on D % %
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%. Complete this question by entering your answers in the tabs below. Required A Required B Required E What are the betas of the two stocks? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Aggressive stock Defensive stock Beta
Given the information in the table below, which of the following statements is correct, assuming that either security will be held in a portfolio with other investments? Stock Expected Return Required Return Beta Standard Deviation A 10% 12% 0.9 25% B 8% 5% 0.3 35% Question 26 options: The investor should purchase both stocks because their beta is less than that of the market. The investor should purchase A since its risk, as measured by standard deviation, is the lowest. The investor should purchase A because it requires the highest rate of return. The investor should purchase B since its expected return exceeds its required return.
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…
E(FAssume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (Rs) on stock B. The risk-free rate (R;) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (BA) to beta of B (BB). a o
1 The information regarding the risk level of three different stocks is presented below. 1. Which stock has the highest level of risk? Interpret the beta of that stock. 2. Which stock has the level of risk that is closest to the market level of risk? How do we measure the market level of risk? Beta Standard Deviation Flylnc 2.1 15.8% Airco 1.1 17.3% SkyCorp 0.8 21.5%
a. Calculate the change in retur Security A's change in return w Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security A BC Print Beta 1.63 0.62 -0.24 ---n Done X iod.
If markets are efficient then: All stocks will have the same expected returns All stocks will have the same risk Two stocks will the same volatility will have the same expected returns Two stocks with the same priced risks will have the same expected returns

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