You have been assigned the task of estimating the expected returns for three different stocks: A, B, and Č. Your preliminary analysis has established the historical risk premia associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: AMkt = 7.5%, AmACRo1 = -0.3%, and AMacro2 = 0.6%. You have also estimated the following factor loadings for all three stocks with respect to each of these potential risk factors: Stock MKT MACRO1 MACRO2 A 1.24 -0.42 0.54 -0.09 B 0.91 0.23 1.03 a) Calculate expected returns for three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. b) Calculate the expected returns for three stocks using all three risk factors and Activate the same 4.5% risk-free rate. Go to Settin

You have been assigned the task of estimating the expected returns for three different stocks: A, B, and Č. Your preliminary analysis has established the historical risk premia associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: AMkt = 7.5%, AmACRo1 = -0.3%, and AMacro2 = 0.6%. You have also estimated the following factor loadings for all three stocks with respect to each of these potential risk factors: Stock MKT MACRO1 MACRO2 A 1.24 -0.42 0.54 -0.09 B 0.91 0.23 1.03 a) Calculate expected returns for three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. b) Calculate the expected returns for three stocks using all three risk factors and Activate the same 4.5% risk-free rate. Go to Settin

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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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
You are facing three stock investment alternatives, Stock A, Stock B and Stock C. Given the following information, please indicate which stock is (are) overvalued, which stock is (are) undervalued, and which stock is (are) correctly priced based on the required returns calculation using the Capital Asset Pricing Model (CAPM or Security Market Line=SML). The risk free rate is 3% and the risk premium for the market index return is 5%. Please Show Work Expected Stocks Returns BETA A 14% 1.2 B 8% 0.67 C 20% 2.5
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
We know that two stocks A and B are correctly priced by the CAPM model. For A, the expected return is 12%, and the beta is 1.5; for B, the expected return is 6%, and the beta is 0.5. Based on this information, what is the risk free rate and expected market return? Select one: A. 3%; 9% B. 3%; 6% C. 2%; 8% D. 4%; 10%
The index model for stock A has been estimated with the following result: RA = 0.01 + 0.9RM + eA. If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is:
Consider the stocks in the table with their respective beta coefficients to answer the following questions:a. Which of the assets represents the most sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have if you add it to an investment portfolio in a higher proportion than all other assets? b. Which of the assets represents the least sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have, if you add it to an investment portfolio in a greater proportion than all other assets? Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94
he covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A
Your employer has asked you to investigate the firm’s portfolio risk and return. The portfolio comprises three stocks. It is invested 50 percent in stock A, 30 percent in stock B and 20 percent in stock C. You gathered the following information: a) Determine what is the portfolio’s expected return b) Determine the portfolio’s variance and standard deviation c) Assume that the expected risk-free rate is 2.75 percent. Determine the expected risk premium on the portfolio.

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