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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Intro We know the following expected returns for stocks A and B, given different states of the economy: State (s) Probability E(rA.s) E(rB,s) -0.1 0.04 0.08 0.05 0.13 0.07 Recession 0.2 Normal 0.5 Expansion 0.3 Part 1 What is the expected return for stock A? 3+ decimals Submit
None
Consider the following data State of Nature Prob. Stock A Return Boom 0.3 16.00% Normal 0.6 14.20% Recession 0.1 8.00% If the current rate on a treasury bill is 4%, what is the risk premium on the stock? (Note: treasury bill rate is generally regarded as risk free rate) Group of answer choices 10.12% 8.14% 14.12% 11.12%
QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68
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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).
5. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 20.0 REQUIRED RATE OF RETURN (Percent) 6 18.0 12.0 60 0.5 1.0 RISK (Beta) Retum on HC's Stock 20
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%.
Question 3 A stock has an HPR of 8.7% and a CAPM return of 10.5%. Which of the following is true? You should short the stock because it is undervalued. You should buy the stock because it is overvalued. You should buy the stock because it is undervalued. You should short the stock because it is overvalued. QUESTIOn 4 Beta can change over time and can be different between sources. Which of the following is not a reason why betas may be different depending on the source? Beta is based on historical values. Beta may be calculated using dfferent periodicities, such as monthly, weekly, or daily. The market benchmark may differ. Beta may be calculated using 3 years of data instead of 5 years of data.
Consider the following information about Stocks I and II: State of Economy Recession Normal Irrational exuberance Probability of State of Economy .20 .60 .20 Rate of Return if State Occurs The standard deviation on Stock I's return is deviation on Stock Il's return is stock's systematic risk/beta, Stock Stock I .09 .18 .12 Stock II -.26 .13 .46 The market risk premium is 5 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) 3.79 percent, and the Stock I beta is percent, and the Stock II beta is is "riskier". 2.20 The standard . Therefore, based on the
8 Consider the following information on Stocks I and II: State of Economy Recession Normal Irrational exuberance a. Beta Standard deviation Probability of State of Economy .28 .63 .09 b. Beta The market risk premium is 11.3 percent, and the risk-free rate is 4.3 percent. a. Calculate the beta and standard deviation of Stock I. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. b. Calculate the beta and standard deviation of Stock II. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskier"? Rate of Return if State Occurs Stock I Stock II Standard deviation c. Most systematic risk d. Most unsystematic risk e. "Riskier" stock .035 .335 .195 % -.23 .15 .43 %
Intro You've estimated the following expected returns for a stock, depending on the strength of the economy: State (s) Probability Expected return Recession -0.02 Normal 0.09 Expansion 0.14 Part 1 What is the expected return for the stock? 3+ decimals Submit 0.2 0.5 0.3 Part 2 What is the standard deviation of returns for the stock? 3+ decimals Submit

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