Stock Y has a beta of 1.30 and an expected return of 13.0%. Stock Z has a beta of .75 and an expected return of 10.5%. If the risk-free rate is 4.50% and the market risk premium is 7.00%, are these stocks overvalued (over-priced) or undervalued (under-priced)? (don't confuse price with Return) Stock Y Stock Z

Stock Y has a beta of 1.30 and an expected return of 13.0%. Stock Z has a beta of .75 and an expected return of 10.5%. If the risk-free rate is 4.50% and the market risk premium is 7.00%, are these stocks overvalued (over-priced) or undervalued (under-priced)? (don't confuse price with Return) Stock Y Stock Z

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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Problem 1 You are given the following information about stock X and the market portfolio, M: Riskless Asset (f) Stock X Market Portfolio (M) E(r) 0.04 (4%) ? 0.10 σ 0.00 0.30 0.20 You are not given the expected return of stock X. The correlation of the returns on the stock X and the market portfolio is equal to 0.4. a) What is the beta (6) of stock X? b) Assuming the CAPM holds, what is the expected return on stock X? c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300 in the market portfolio. What is the overall expected return, standard deviation and beta of this portfolio?
None
Suppose that stocks are exposed to systematic risks only so that stock i has the following return structure: Ri,t = mį + Si,t where mi is the average return, and si,t is the systematic risk. When we construct a portfolio including more and more stocks, which of the following would happen? The portfolio volatility gradually decreases and eventually converges to a certain positive value. ● The portfolio volatility gradually decreases and eventually converges to zero. The portfolio volatility stays unchanged.
A stock's returns have the following distribution: Demand for theCompany's Products Probability of thisDemand Occurring Rate of Return ifthis Demand Occurs Weak 0.1 (36%) Below average 0.1 (11) Average 0.4 17 Above average 0.3 27 Strong 0.1 56 1.0 Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:
Give me three steps solution and explanation
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) + 6.5 Change in energy prices 0.5 Change in long-term interest rates +2.9 Calculate expected rates of return on the following stocks. The risk - free interest rate is 6.8%. A stock whose return is uncorrelated with all three factors
Assume the CAPM holds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the market portfolio. The market portfolio's Sharpe ratio is 0.30 and the the risk-free rate is 5%. (a) What is Stock X's expected return? (b) What proportion of Stock X's return volatility (i.e. standard deviation) is priced by the market? Explain why this number is less than 1.
2) see picture
A stock's returns have the following distribution: Demand for theCompany's Products Probability of thisDemand Occurring Rate of Return ifthis Demand Occurs Weak 0.1 (28%) Below average 0.1 (10) Average 0.4 12 Above average 0.3 22 Strong 0.1 55 1.0 Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places. Stock's expected return: % Standard deviation: % Coefficient of variation: Sharpe ratio:
39) Suppose the beta estimated from the CAPM for stock A is 2.3 and stock B is 1.1. Which of the following is true? According to the CAPM, the required rate of return of stock B is higher The beta of the equally weighted portfolio of stock A and B is 1.6 According to the CAPM, stock A has a higher idiosyncratic risk None of the above
The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True False
Compute the abnormal rates of return for the following stocks assuming the following systematic risk measures (betas): Rit = return for stock i during period t Rmt = return for the aggregate market during period t Bi = beta for stock i Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBt: ARFt: ARTt: ARct: ARET: % % % % Stock B F T C E % Rit 10.1% 9.4 13.2 11.2 15.1 Rmt 3.9% 8.5 10.0 15.6 11.2 Bi 1.00 1.10 1.45 0.65 -0.40

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