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 = 3.2%. The rate of return on Bpex was only rB = 2.6%. The market today responded to very encouraging news about the unemployment rate, and M = 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: rg-0.18 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? O Apex O Bpex

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 = 3.2%. The rate of return on Bpex was only rB = 2.6%. The market today responded to very encouraging news about the unemployment rate, and M = 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: rg-0.18 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? O Apex O Bpex

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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Porter Plumbing's stock had a required return of 12.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.) Select the correct answer. a. 15.45% b. 14.25% c. 14.55% d. 14.85% e. 15.15%
In historical data, we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last? a. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds. b. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. c. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks. d. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. e. Small-company stocks, long-term corporate bonds,…
A stock has the following four factors which were used to explain the return on Stock YGF and the level of sensitivity of each factor and the risk premium associated. GDP growth: β= 0.4, RP= 3% Inflation rate: β= 0.5, RP=3% Commodity prices: β=-0.6, RP=6% Standards and Poor’s 500 Index Returns: β=1.5, RP=8% While the risk free rate is 4% Using the APT formula, calculate the expected returns on the said stock
A stock analyst is interested with the stock of SMC. He conducted a research and came up with a different rates of return for these stock; 10% for strong and 1% for weak economic situations. Based on an economic report, the probability of having a weak economy, normal, and strong, are 30%, 50%, and 20%, respectively. The computed expected return of SMC stock is 5.3%. What is the rate of return of SMC if the economy turns normal? (In percentage)
An analyst has estimated how a particular stock’s return will vary depending on what will happen to the economy. What is the standard deviation? STATE OF THEECONOMY PROBABILITY OFSTATE OCCURRING STOCK'S EXPECTEDRATE IF THISSTATE OCCURS Recession Below Average Average Above Average Boom .10 .20 .40 .20 .10 (.60) (.10) .15 .40 .90
Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 5%, and all stocks have independent firm- specific components with a standard deviation of 48%. Portfolios A and B are both well diversified. Portfolio A B Beta on M₁ 1.6 2.2 Beta on M₂ 2.3 -0.6 Required: What is the expected return-beta relationship in this economy? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(rp) = Expected Return (%) 38 8 Answer is complete but not entirely correct. Bp1 + 5.00 % 4.43 11.26 Bp2
Another stock from the same industry, namely CEB, has a Coefficient of Variation of 3.25. What is the coefficient of variation of the riskier stock? (Type the Coefficient of Variation only)
2. Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3.5%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks: 1. a. At current market prices, which stocks represent buying opportunities? b. On which stocks should you put a sell order in? Complete the table with the alphas below: (Round to one decimal place.) Expected Return Volatility Beta Alpha Green Leaf 12% 20% 1.50 % NatSam 10% 40% 1.80 % HanBel 9% 30% 0.75 % Rebecca Automobile 6% 35% 1.20 %
The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2.1% over the coming month. Beta 1.1 R-square 0.65 a. Suppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard deviation as Waterworks. Assume the residual returns on each of these stocks are independent of each other. What is the residual standard deviation of the portfolio? (Round your answer to 1 decimal place.) Residual standard deviation Standard Deviation of Residuals 0.13 (1.e., 13% monthly) Probability of a loss b. Calculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged positions in the 100 stocks over the next month. Assume the risk-free rate is 0.3% per month. (Do not round intermediate calculations. Enter your answer as percent rounded to 5 decimal places.) % %
Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct and why? A. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. B. The prices of all stocks would decline, but the decline would be greatest for the highest-beta stocks. C. The prices of all stocks would increase, but the increase would be greatest for the highest-beta stocks. D. The required return on all stocks would increase by the same amount.
Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. c. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. d. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. e. The required return on all stocks would increase by the same amount.
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.

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