Question two The rate of retum on treasury bills (a risk free asset) is 4% p.a. The expected retum on the FT All Share index portfolio is 9%p.a. Stocks A and B both have anticipated (forecast) returns of 10% p.a. and a price of 100p. Stock A has a beta of 0.8 and stock B has a beta of 1.7. Are these shares mispriced? If so, should they be bought or sold?

Question two The rate of retum on treasury bills (a risk free asset) is 4% p.a. The expected retum on the FT All Share index portfolio is 9%p.a. Stocks A and B both have anticipated (forecast) returns of 10% p.a. and a price of 100p. Stock A has a beta of 0.8 and stock B has a beta of 1.7. Are these shares mispriced? If so, should they be bought or sold?

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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Stock A's stock has a beta of 1.30, and its required return is 13.75%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Select the correct answer. a. 10.26% b. 10.32% c. 10.29% d. 10.35% e. 10.38%
Pick the best answer to the following portfolio? (Round off all numbers to 2 decimal places) Stock Amount Invested Beta A $6,700 1.16 B 3,000 1.23 C 8,500 0.79 Group of answer choices The portfolio has more systematic risk than the market. The portfolio has more total risk than the market. The portfolio has no systematic risk. The portfolio has same systematic risk as the market. The portfolio has less systematic risk than the market.
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
What is the required return for each stock? What is required return for stock B? Scenario Probability Stock A Stock B Market Risk-free rate Bust 0.25 -0.15 -0.05 Normal 0.55 0.2 0.1 Boom 0.2 0.4 0.3 Beta 1.2 0.9 Expected return 0.13 0.05
Question four Risk is usually measured in terms of the volatility in the historical returns generated by shares. Is this a good indicator of future risks in fast changing sectors? What implications does this have for the analysis of risk? Question five Explain briefly what beta (the relative risk) measures. Is this the only type of risk that a fim faces? Question six (a) Stocks A and market have the following estimated returns: RA RM year 2018 -18% -24% 2019 44% 24% 2020 -22% -4% 2021 22% 8% 2022 34% 56% Required to )Calculate the expected rate of return for stock A and Market đuring the 5-year period. (ii) Now calculate the total risk of stock A and Market (b)The market M and Stock J have the following probability distributions: State of the economy Probability RM RJ Вoom 0.3 15% 20% Depression Recovery 0.4 9% 5% 0.3 18% 12% Required to (1) Calculate the expected rates of retum for the market and Stock J. (ii) Calculate the standard deviations for the market and Stock J.
U Assume CAPM holds. We know expected return and beta of two stocks: Stock A: E[ra] = 10% and beta_a = 1.5 Stock B: E[rb] = 5% and beta_b = 0.5 What would be the expected return of a stock that has a beta of 0.9? O 6.5% Ⓒ7% O 7.5% O 6% Question 5 Which of the following statements is false? o The CAPM follows from equilibrium conditions in a frictionless mean-variance economy with rational investors According to CAPM, everyone should hold a mix of the market portfolio and the risk-free asset. According to CAPM, everyone can generate positive return by buying positive alpha stocks and by selling negative alpha stocks. According to CAPM, the expected return on a stock is a linear function of its beta.
Consider the following information about Stocks I and II: State of Economy Recession Normal Irrational exuberance Probability of State of Economy .30 .50 .20 Rate of Return if State Occurs Stock I .04 16 .05 on the stock's systematic risk/beta, Stock The market risk premium is 8 percent and the risk-free rate is 5 percent. (Do not round intermediate calculations. Enter the standard deviations as a percent and round all answers to 2 decimal places, e.g., 32.16.) Stock II -.19 06 .39 The standard deviation on Stock I's expected return is Stock I beta is 0.65 22.11 percent, and the Stock II beta is Answer is complete but not entirely correct. percent, and 5.81 the The standard deviation on Stock Il's expected return is is "riskier". 0.01 Therefore, based
A4 6 b b. Suppose we observe two stocks with the following characteristics: Stock Expected return Beta M 20% 1.6 N 12% 0.9 An asset is said to be undervalued if its price is too low given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks undervalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not undervalued).
Assume that the risk-free rate is 2.5% and the market risk premium is 8%. What is the required return for the overall stock market? Round your answer to one decimal place. ? % What is the required rate of return on a stock with a beta of 0.5? Round your answer to one decimal place. ? % The above is a two part question, therefore the second answer is determined based off the first answer provided. Please, please, please do provide both answers.
8. Stocks A and B have the following data. The market risk premium is 5.0% and the risk-free rate is 4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta 1.20 0.80 Constant dividend growth rate 7.00% 4.00% (a) Stock B must have a higher capital gain yield than Stock A. (b) Stock B must have a higher dividend yield than Stock A. (c) Stock B’s dividend yield is higher than its expected dividend growth rate. (d) Stock B must have the higher required return. (e) The expected return of Stock A is 11%.
A) What expected return should an investor expect from investments in common stock? You are given the following information: Risk free rate of return = 4%; market risk premium = 11%; Beta of the stock (assume CAPM holds) = 0.72. B) Stock A with beta of 0.8 offers a 11% return while stock B with a beta of 1.2 offers a 15% return. What is the risk-free rate? What is the common market return? Assume CAPM holds.
Question: A stock has an expected return of 10.9 percent, the risk-free rate is 3.1 percent, and the market risk premium is 6.9 percent. What must the beta of this stock be?

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