You are reviewing two investment opportunities: the shares of company A and company B. Company A has a beta of 1.01 and a standard deviation of 20%. Company B has a beta of 1.30 and a standard deviation of 15%. Which security has a greater overall risk (choose one)? Company B Company A Which security has a greater systematic risk (choose one)? Company B Company A Which security should offer a higher expected return (choose one)? Company A Company B

You are reviewing two investment opportunities: the shares of company A and company B. Company A has a beta of 1.01 and a standard deviation of 20%. Company B has a beta of 1.30 and a standard deviation of 15%. Which security has a greater overall risk (choose one)? Company B Company A Which security has a greater systematic risk (choose one)? Company B Company A Which security should offer a higher expected return (choose one)? Company A Company B

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 stock's risk has a component called _____________________, which can be minimized as we add more stocks to our portfolio. Select all that apply. A) market risk B) firm-specific risk C) diversifiable risk D) systematic risk
(Expected return and risk) Universal Corporation is planning to invest in a security that has several possible rates of return. Given the probability distribution of returns in the popup window, , what is the expected rate of return on the investment? Also compute the standard deviation of the returns. What do the resulting numbers represent? a. The expected rate of return on the investment is ☐ %. (Round to two decimal places.) b. The standard deviation of the returns is %. (Round to two decimal places.) c. What do the resulting numbers represent? (Select the best choice below.) ○ A. Universal could expect a return of 8.75 percent with a 67 percent possibility that this return would vary up or down by 8.04 percent. B. Universal could expect a return of 8.04 percent with a 67 percent possibility that this return would vary up or down by 8.75 percent. C. Universal could expect a return of 8.75 percent with a 25 percent possibility that this return would vary up or down by 8.04 percent.…
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How do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.
The expected return and standard deviation of return of two risky securities is given below Expected Return Security A B 12% 16% Standard deviation 20% 30% Assets A and B are perfectly positively correlated and the risk-free rate is 10%. Find the optimal risky portfolio (1.e. weights for security A and B) and show it graphically? Ordinarily you would not be able to answer this question without tracing out the efficient frontier by solving the Markowitz model. However, since the assets are perfectly positively correlated, you don't need to solve the Markowitz model all combinations of A and B lie on a straight line between them. With that in mind consider what is the best you can do when you combine a riskless asset with the possible risky portfolios (that lie on the straight line) you face.
For a market timer, the ________ will be higher when the market risk premium is higher Select one: a. portfolio’s idiosyncratic risk b. portfolio’s standard deviation c. portfolio’s beta d. security selection component of the portfolio e. portfolio’s alpha
Consider the following information (Assume that Security M and Security N are in the same financial market and the market is efficient): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security has more systematic risk? Group of answer choices Security M Security N Equal
The security market line depicts: a. Expected return as a function of systematic risk (indicated by beta) b. The market portfolio as the optimal portfolio of risky assets c. The relationship between a security’s return and the return on the index d. Portfolio combinations of the market portfolio and the risk-free asset e. Expected return as a function of volatility
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22 Aggressive Stock -3% 35 Defensive Stock 4% 12 Required: a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22 Aggressive Stock -3% 35 Defensive Stock 4% 12 Required: a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%. Complete this question by entering your answers in the tabs below. Required A Required B Required E What are the betas of the two stocks? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Aggressive stock Defensive stock Beta
The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45
Consider an environment of 40 individual risky securities and one risk free asset. One investoris selecting between the Markowitz mean-variance frontier framework and the index model inthe portfolio analysis. Answer the following questions: (a) How many parameters are used as the input to construct the mean-variance frontier (b) How many inputs are used for the index model? calculate aswell

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