Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 5.0% +1.30RM + ед RB -2.0% +1.60RM + еB OM - 20%; R-squarе д 0.20; R-squareB = 0.12 Break down the variance of each stock to the systematic and firm-specific components. Note: Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Round your answers to nearest whole number. Systematic Firm-specific Risk for A Risk for B 0 0 1

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 5.0% +1.30RM + ед RB -2.0% +1.60RM + еB OM - 20%; R-squarе д 0.20; R-squareB = 0.12 Break down the variance of each stock to the systematic and firm-specific components. Note: Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Round your answers to nearest whole number. Systematic Firm-specific Risk for A Risk for B 0 0 1

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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(a) XVW Ltd. currently holds a portfolio containing two assets; Asset 1 and Asset 2. If Er1 = 0.25, Er2 = 0.36, Er12 = 0.1, Er2 2 = 0.15 and Er1r2 = 0.125, where ri represents the return in asset i. Determine the optimal proportions in which each asset should be held if the company would like to minimize the variance of their portfolio %3D
What is the average annual return? b. What is the variance of the stock's returns? c. What is the standard deviation of the stock's returns? Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format. Year 1 2 3 4 Return (%) Year1: -4.1% Year2: 27.6% Year 3: 12.3% Year 4: 3.6%
Consider the following probability distribution for stocks A and B: Table 4 Probability Distribution for Stocks A and B State Probability Return on Stock A Return on Stock B 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% The variances of Stocks A and B are _____ and _____, respectively. Group of answer choices .015%; .019% .022%; .012% .032%; .02% .015%; .011% .014%; .021%
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the market's average return was 14%. Performance is measured using an index model regression on excess returns. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns Stock A 1% +1.2(rm - rf) Stock B 2% +0.8(rm – rf) 0.635 0.466 11.3% 22.6% 20.1% 26.9% Required: a. Calculate the following statistics for each stock: b. Which stock is the best choice under the following circumstances? Complete this question by entering your answers in the tabs below. Required A Required B Calculate the following statistics for each stock: Note: Round your answers to 4 decimal places. i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure Stock A Stock B % %
When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero
2.
Given the following information, calculate the expected value for Firm C's EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and σA = $3.63; E(EPSB) = $4.20, and σB = $2.94. Do not round intermediate calculations. Round your answer to the nearest cent. Probability 0.1 0.2 0.4 0.2 0.1 Firm A: EPSA ($1.61) $1.80 $5.10 $8.40 $11.81 Firm B: EPSB (1.20) 1.30 4.20 7.10 9.60 Firm C: EPSC (2.59) 1.35 5.10 8.85 12.79 E(EPSC): $ You are given that σc = $4.12. Discuss the relative riskiness of the three firms' earnings using their respective coefficients of variation. Do not round intermediate calculations. Round your answers to two decimal places. CV A B C The most risky firm is .
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.
Based on the information, calculate expected returns for each share, variance for each share and standard deviation for each share
If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) | Slope of the line %
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…
QUESTION 1 Under which of the following scenarios, the minimum variance portfolio that contains two stocks has the smallest standard deviation? OA. The correlation between the two stock returns is -1 OB. The correlation between the two stock returns is -0.2 OC. The correlation between the two stock returns is 0.2 OD. The correlation between the two stock returns is 0.5

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