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 (i.e., market returns explain more of its return patterns)?

Q: The wider the dispersion of returns on a stock, the:

A: Investors evaluate the portfolio or security on the basis of risk profile. The risk profile can be…

Q: Suppose that stocks are exposed to independent risks only so that stock has the following return…

A: Return from the Portfolio is given by Ri,t =mi+si,t where Ri,t= return on the portfolio           mi…

Q: Illustrate the impact of changes in the dividend, the growth rate, the expected return on the…

A: The value of a stock is determined by several factors, including the dividend, the growth rate, the…

Q: The return earned for Asman stock is between time 1 and time 2 is ??? The between time 2 and time 3…

A: To compute the annual rates of return for both Asman and Salinas stocks between the given times, we…

Q: When the required returns on all stocks are graphed against their corresponding betas, Question…

A: The objective of the question is to identify the financial concept that is represented when the…

Q: 1. What are beta measures? (a) The volatility of the security (b) The joint volatility of any two…

A: Beta helps in measuring the systematic risk of a security or portfolio compared to the market as a…

Q: You have also decided that you have a risk-aversion (A) of 4. (a) What is the expected return for…

A: Since you have posted a question with multiple subparts, we have answered the first three subparts…

Q: Define average stock’s beta

A: Beta tells about the change in stock’s return given to change in market risk.

Q: A stock has a negative beta and does not pay dividends. Given this information, a model that is…

A: CAPM model can be used to understand the manner expected return related to undiversifiable risk.…

Q: sing the single factor model for firm with a Beta of 1 and when the standard deviationof the market…

A: If the beta of a firm's stock is 1, it means there is a risk or standard deviation of the firm…

Q: And what are the expected returns for stocks A and B if the conditions are as follows? A0 0.03…

A: Calculation of Expected Return for Stock A:

Q: The beta of an investment measures the probability weighted expected rate of return of a portf True…

A: Beta is measure of the risk and volatility of the stock and show how much is change in return with…

Q: The expected returns for David’s portfolio were calculated based on three possible conditions in the…

A: Standard deviation is a measure of unsystematic risk which shows the variability of returns of a…

Q: Which of the following is (are) correct regarding average returns? A B The geometric mean is a…

A: In finance the geometric average return is a way to figure out the rate of return, on an investment…

Q: 1. The market and Stock A have the following probability distributions: Return on Return on…

A: Coefficient of Variation = Standard Deviation / Average Return

Q: Calculate Stock B’s beta.     b. If Stock B’s beta were 0.80, what would be its new rate of return?

A: Information Provided: Risk free rate of return = 2% Market return = 7% Stock B's return = 11%

Q: Which of the following statements about CAPM is true? a. The expected return of a zero-beta security…

A: CAPM is the capital asset pricing model. As per CAPM expected return as follows: Expected return =…

Q: Consider the following regression Pt * - Pt = .07(1.4) + .4*Pt (3.6) + et where Pt * is Shiller’s ex…

A: The efficient markets theory is a theoretical framework that explains the functioning of financial…

Q: Table 7.7 Estimated Means and Standard Deviations of Stock Returns Stock Mean Standard Deviation 123…

A: Portfolio return:A portfolio return is a measurement of the performance of a collection of…

Q: beta for a stock

A: Introduction: Beta can be defined as a metric which helps in measuring the volatility of a stock…

Q: imate that the correlation between Abercrombie and Fitch (ANF) stock returns with market portfolio…

A: Beta of stock shows the risk related to overall market that means how much will change in stock…

Q: . Suppose the index model for stocks A and B is estimated with the following results: rA = 2% +…

A: Variance is a statistical measure that quantifies the dispersion or spread of a set of data points…

Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: Calculate the expected return using SML equation as follows: Expected return = Risk free rate +…

Q: equals the slope of the security market line: one. beta. the market risk premium. the expected…

A: Security refers to the financial asset which doesn’t have any real value like golds and other metals…

Q: Why is beta the theoretically correct measure of a stock’s risk?

A: Introduction: Risk refers to the degree of volatility involved in the anticipated return on…

Q: How do you calculate the beta of stock?

A: Beta is the measure of stock's volatility to the overall market, and is calculated as-

Q: Suppose stock returns have a 2-factor structure. You observe a broad stock market portfolio A which…

A: Portfolio A return (Ra) = 7.4% Portfolio B return (Rb) = 10.6% Beta of first factor for A (A1) = 0.5…

Q: Higher a stock’s volatility, why does the higher the probability of large increases or decreases in…

A: Stock Volatility:   Volatility is defined as a statistical measure of the dispersion of the returns…

Q: Suppose that stocks are exposed to systematic risks only so that stock i has the following return…

A: Return from the Portfolio is given by Ri,t =mi+si,t where Ri,t= return on the portfolio           mi…

Q: Interpret your results in (c) above, assuming that the historical average return of 8.5% from the…

A: d) In part c, at a rate of 8.59% the stock is considered to be fairly priced. However, since the…

Q: (Singular) Suppose there are two stocks that are uncorrelated. Each of these has variance of 1, and…

A: Giventwo uncorrelated stocks with variance of 1 and expected returns of r1​ and r2​, respectively,…

Q: In the CAPM world, if Sharpe ratio of the market portfolio is 1.25 and the correlation coefficient…

A: Sharpe ratio is used to determine the excess return which is earned by the investor for investing…

Q: If markets are in equilibrium, which of the following conditions will exist? a. Each stock's…

A: The objective of the question is to identify the correct condition that will exist when markets are…

Q: When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto…

A: The objective of the question is to identify the correct statements about the Alpha and Gamma…

Q: ds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the…

A: Assume the CAPM holds and consider stock X, which has return variance of 0.09 and correlation of…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.