Suppose that the risk-free rate of return is 5%, and the expected rate of return on the market portfolio (with a beta of 1) is 14%. In addition, investors forecast a rate of return of 15% for Stock X, and of 17% for Stock Y. The two stocks have a standard deviation and beta as indicated in the Table below. Stocks Standard Deviation Beta X 36 % 0.8 Y 25 % 1.5 a. Calculate the fair expected rate of return and the alpha for each stock

Suppose that the risk-free rate of return is 5%, and the expected rate of return on the market portfolio (with a beta of 1) is 14%. In addition, investors forecast a rate of return of 15% for Stock X, and of 17% for Stock Y. The two stocks have a standard deviation and beta as indicated in the Table below. Stocks Standard Deviation Beta X 36 % 0.8 Y 25 % 1.5 a. Calculate the fair expected rate of return and the alpha for each stock

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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Finance The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Arethese stocks correctly priced? Why or why not? Use E(Ri) = Rf + βi(E(RM) − Rf).
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information: Stock A Beta 1.33 Expected Return 12% Stock B Beta 0.7 Expected Return 10% (a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words] (b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively. (please show me steps and round the final answer to 2 decimal places, thanks)
Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (7 %) (26 %) 0.1 3 0 0.5 14 22 0.2 20 26 0.1 36 50 Calculate the expected rate of return, , for Stock B ( = 14.20%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.68%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have a higher…
Stock A has a correlation with the market of 0.53. Assuming that the standard deviation of returns for Stock A is 24.0% and that the standard deviation of returns for the market is 10.0%, what is beta for stock A? A 1.31 B. 1.27 C. 0.17 D. 0.22
Stock Y has a beta of 1.4 and an expected return of 15.1 percent. Stock Z has a beta of .7 and an expected return of 8.6 percent. If the risk-free rate is 5 percent and the market risk premium is 6.5 percent, the reward-to-risk ratios for Stocks Y and Z are the SML reward-to-risk is percent, Stock Y is and percent, respectively. Since and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Stock A has a beta of 1.30, and its required return is 13.25%. Stock B's beta is 0.90. 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.)
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.) a. The effect of a change in the market risk premium depends on the slope of the yield curve. b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the level of the risk-free rate. e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
The following are estimates for two stocks. Firm- Specific Expected Standard Stock Return Beta Deviation A 14% 0.90 30% B 21 1.40 42 The market index has a standard deviation of 20% and the risk-free rate is 7%. Required: a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with proportions: Stock A Stock B T-bills 0.30 0.45 0.25 Compute the expected return, beta, nonsystematic standard deviation, and standard deviation of the portfolio.
Assume that the risk-free rate is 2.8 percent, and that the market risk premium is 4.8 percent. If a stock has a required rate of return of 16.1 percent, what is its beta? Your Answer: Answer
Question
1. Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .8 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are ____ and ____ percent, respectively. Since the SML reward-to-risk is ____ percent, Stock Y is ____(undervalued/ overvalued) and Stock Z is ____(undervalued/ overvalued).

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