Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.06 in recession, and 0.08 in an economic boom. For the market the state dependent returns are -0.12 in recession, and 0.16 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50. Compute the covariance between Goldday and the market. * State your answer in decimal form, working your analysis using at least four decimal places of accuracy.

Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.06 in recession, and 0.08 in an economic boom. For the market the state dependent returns are -0.12 in recession, and 0.16 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50. Compute the covariance between Goldday and the market. * State your answer in decimal form, working your analysis using at least four decimal places of accuracy.

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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Match the following A premium over and above the risk-free rate. ✓ The computed cost of capital determined by multiplying the cost of each item in the optimal capital structure by its weighted representation in the overall capital structure and summing the results A measure of the amount of debt used in the capital structure of the firm Superior growth of a firm may achieve during its early years, before leveling off to a more normal growth ✓ The earnings available to common stockholders divided by the number of common stock shares outstanding ✓ A line or equation that depicts the risk-related return of a security based on risk-free rate plus a market premium related to the beta coefficient of the security A measure of the spread or dispersion of a series of numbers around the expected value A model for determining the value of a share of stock by taking the present value of an expected stream of future dividends. A. Supernormal Growth B. Market Risk Premium C. Financial Leverage D.…
Consider the following information: State of Economy Boom Probability of State of Economy Security Returns if State Occurs (Stock A) Security Returns if State Occurs (Stock B) Security Returns if State Occurs (Stock C) .10 .18 .48 .33 Good Poor ? .11 .18 .15 Bust .40 .30 .05 -.09 -.05 -.03 -.32 -.09 Your portfolio is invested 30 percent each in Stocks A and C and the rest in Stock B. What is the percentage standard deviation of the portfolio?
Stock W has the following returns for various states of the economy: State of the Economy Probability Stock W's Return Recession 0.15 -10% Below Average 0.20 5% Average 0.30 8% Above Average 0.25 12% Boom 0.10 18% Stock W’s Sharpe ratio assuming the risk-free is 1.25%
Following are three economic states, their likelihoods, and the potential returns: Economic State Fast growth Slow growth Recession Probability 0.27 0.35 0.38 Standard deviation Return 32% 4 -22 Determine the standard deviation of the expected return. (Do not round intermediate calculations and round your answe decimal places.) %
Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.06 in recession, and 0.08 in an economic boom. For the market the state dependent returns are -0.06 in recession, and 0.14 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50. Compute the beta of Goldday. * State your answer in decimal form, working your analysis using at least four decimal places of accuracy.
Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone:
For the cost of equity (stock) is it better to use the current US Treasury bill rate or a longer-termgovernment bond rate as the risk-free rate of return?Does the rate you use as the risk-free rate have an impact on what market premium might beappropriate? Historically, large-company stocks have earned an average return of 12.1% per annum, while US Treasury bills and long-term government bonds have earned average returns of 3.5% and5.9% respectively.
There are three factors that can affect the shape of the Treasury yield curve (r*tt, IPtt, and MRPtt) and five factors that can affect the shape of the corporate yield curve (r*tt, IPtt, MRPtt, DRPtt, and LPtt). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. Upward-sloping yield curve Inverted yield curve Downward-sloping yield curve Identify whether each of the following statements is true or false. Statements True False If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) The default risk on…
The following information relates to the possible returns of ABC limited share depending on the performance of the economy: State of the economy Probability of the returns Return Boom 0.4 20% Normal 0.4 15% Recession 0.2 9% Required: i. Compute the expected return of the share ii. Compute the standard deviation and coefficient of variation of the share.
Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…
Consider the following scenario analysis: Rate of Return Stocks Scenario Bonds Probability 0.20 Recession -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No Ⓒ Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Standard Deviation Return Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? Stock
The sensitivity of a mining company’s stock to unexpected changes in interest rates and GNP is measured by betas of 0.85 and 0.20. What is the expected rate of return on the company’s stock if market-wide expected rates of return for portfolios with no systematic risk and with sensitivity only to interest rates and GNP are 6.0%, 8.0%, and 11.0% respectively.

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