You are analyzing two possible stock market investment strategies. For each of the following, identify whether or not it would be classified as a fair bet. Would a risk-averse person make either of these investments? Why or why not? a. One strategy is to invest in a blue chip stock like Microsoft that has a proven track record. There is a 25% chance that the company continues its steady growth and your wealth increases by $30,000. There is a 75% chance that the company becomes unprofitable and your wealth decreases by $10,000. b. Another strategy is to invest in a start-up. There is a 10% chance that the company is a success and your wealth increases by $100,000. However, there is a 90% chance that the company fails and your wealth decreases by $20,000.

You are analyzing two possible stock market investment strategies. For each of the following, identify whether or not it would be classified as a fair bet. Would a risk-averse person make either of these investments? Why or why not? a. One strategy is to invest in a blue chip stock like Microsoft that has a proven track record. There is a 25% chance that the company continues its steady growth and your wealth increases by $30,000. There is a 75% chance that the company becomes unprofitable and your wealth decreases by $10,000. b. Another strategy is to invest in a start-up. There is a 10% chance that the company is a success and your wealth increases by $100,000. However, there is a 90% chance that the company fails and your wealth decreases by $20,000.

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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You have been asked to calculate the required return for a stock that you are considering investing in. You recently looked up the risk-free rate (as measured by Treasury bonds) and found it to be 1%. You also looked up the current market return of the S&P 500 and found it to be 12. If the firm has a beta of 1.2, what is its required return?
Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 2.9% and the expected market return is 12.5%, what is the cost of equity for Stan if the beta of the stock is a.0.72, b.0.86,
You are concerned about the market volatility but have found stocks that are attractively priced. In additionto cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints. You will set aside 12.27% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (i.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $201,290 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 1.35, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? O $250,234 $257,185 $264,136 $271,087 $278,038
You hold a $400 million portfolio of 30 large stocks in various sectors within the S&P500. You are considering switching some of this into stock in a listed shell company (a company whose only assets are cash). In terms of minimising your overall systematic portfolio risk measured by the weighted beta of your portfolio, which option is the most likely to reduce your portfolio’s systematic risk?（No information missing） a Reallocating $50m into the shell company. b I do not want to answer this question. c Reallocating $25m into the shell company and $25m into airline stocks. d Reallocating $50 million into airline stocks. e Remaining fully invested in the S&P500. f Reallocating $100m into airlines stocks.
You work as an economic analyst for an investment firm. You believe there are four possible states for the economy over the next year: Boom, Good, Poor, Bust. Your colleague Tosha has estimated the returns for three stocks based on those four scenarios. One of your clients has a portfolio that is 20.00% invested in Stock A and 30.00% invested in Stock C. The rest of your client's portfolio is invested in Stock B. Use the information below to calculate the expected return, variance, and standard deviation on your client's portfolio. 1. First fill in the missing probability and portfolio weight (cells D19 and F22). 2. Calculate the actual return for the portfolio in each state. 3. Use those portfolio returns and the probabilities to calulcate the portfolio's expected return using the SUMPRODUCT function. 4. Calculate the squared deviation from the mean for each state of the economy. 5. Use the SUMPRODUCT function to get the variance (the probability weighted average of the squared…
Consider the following two scenarios in the economy and the returns in each scena for the market portfolio, an aggressive stock A, and a defensive stock B. a) Required: b) c) Scenario d) Bust Boom Market -8 percent 32 percent Rate of Return Aggressive Stock A -10 percent 38 percent Defensive Stock B -6 percent 24 percent Find the beta of each stock. Explain in what way is Stock B defensive. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the Treasury bill rate is 4 percent, calculate the CAPM for both stocks Based on your answers above, which stock is worth buying Explain your decision.
You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each one’s systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk.If the expected return and standard deviation of returns for Stock A are 10 percent and 25 percent, respectively, and the expected return and standard deviation of returns for Stock B are 16 percent and 36 percent, respectively, which should you choose? Assume that the risk-free rate is 7 percent.
Choose one appropriate statement. 1. The movement of stock prices have certain patterns, and investors can make profits by studying such patterns. 2. If a hedge fund manager believes that Toyota will going to outperform Honda she will short stocks of both companies. 3. When one share of Apple stock is being traded at $150, the stock market believes that you can always sell a share of Apple stock for at least $150 in the future. 4. O An undervalued stock should outperform the market in the long run. 5. O Diversification is not appropriate because it would prevent investors from capitalizing on the superior return that can result from a concentrated holding of the stock of one successful company.
You are working on creating a portfolio that mimics a fully diversified market index. Assume that you have $1 million fund to invest. You plan to allocate $195,000 and $365,000 of your fund to invest in stock A and B, respectively. To achieve your goal, you need to add an additional risky stock C and a risk-free bond to your portfolio. Assume that betas for stock A, B, and C are 0.80, 1.09, and 1.23, respectively. How much would you invest in stock C and risk-free bond?
As the economy goes through highs and lows, investors with stock in various companies can face significant risk, and significant benefits. How do you see the stock market affecting your own investing plans in the future? What types of risks do investors take? Do you have any companies you follow thru their stock prices?
1. You are trying to plan your investments for the next year. You have decided that the market will either be strong (a bull market), weak (a bear market) or normal. You think that stocks, bonds, and bills will earn the following returns in these scenarios: Scenario Bull market Normal market Bear market Probability 0.20 0.55 0.25 Stock Return 0.25 0.10 -0.15 Bond Return 0.06 0.03 0.02 Bill Return 0.03 0.03 0.03 You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities? (b) What is the volatility of each security return? What is the covariance between stock and bond returns? (d) If you combine stocks and bills as an investment, what is your op- timal combination? What is your expected return? What is your portfolio's volatility? (e) If you combine bonds and bills, what is your optimal combination? What is your expected return? What is your portfolio's volatility? (f) If you combine stocks and bonds, what is your optimal…
An analyst is studying the movement of the stock ABC. His research and came up with a different rates of return for ABC, 25% for strong and 10% for weak economic scenarios. Based on the latest economic outlook, the probability of having a strong, normal, and weak economy, are 30%, 50%, and 20%, respectively. The total expected return of ABC stock is 17% considering the various probabilities. Determine the rate of return of ABC if the economy turns normal.

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