Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 11, Problem 17P
What is the volatility (standard deviation) of an equally weighted portfolio of stocks within an industry in which the stocks have a volatility of 50% and a correlation of 40% as the portfolio becomes arbitrarily large?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Assume that the CAPM holds. One stock has an expected return of 8% and a beta of 0.3. Another stock has an expected return of 14% and a beta of 1.5. What is the return-to-risk ratio that CAPM assumes equal across all individual stocks?
a. Determine Stock X's beta coefficient.
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given.
Calculate the standard deviations of returns for both Stock X and the NYSE.
c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise,
assume that the market return is equal to the NYSE's average return. Using the information calculated,
what is the assumed risk-free rate in the CAPM equation?
Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)
Suppose that the standard deviation of returns on each individual stock is 80% per annum and that the covariance between each pair of stocks is 0.25. What is the annual standard deviation of an equally weighted well - diversified portfolio?
Chapter 11 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 11.1 - What is a portfolio weight?Ch. 11.1 - How do we calculate the return on a portfolio?Ch. 11.2 - What does the correlation measure?Ch. 11.2 - How does the correlation between the stocks in a...Ch. 11.3 - Prob. 1CCCh. 11.3 - Prob. 2CCCh. 11.4 - Prob. 1CCCh. 11.4 - Prob. 2CCCh. 11.4 - Prob. 3CCCh. 11.5 - What do we know about the Sharpe ratio of the...
Ch. 11.5 - If investors are holding optimal portfolios, how...Ch. 11.6 - When will a new investment improve the Sharpe...Ch. 11.6 - Prob. 2CCCh. 11.7 - Prob. 1CCCh. 11.7 - Prob. 2CCCh. 11.8 - Prob. 1CCCh. 11.8 - According to the CAPM, how can we determine a...Ch. 11 - You are considering how to invest part of your...Ch. 11 - You own three stocks: 600 shares of Apple...Ch. 11 - Consider a world that only consists of the three...Ch. 11 - There are two ways to calculate the expected...Ch. 11 - Using the data in the following table, estimate...Ch. 11 - Use the data in Problem 5, consider a portfolio...Ch. 11 - Using your estimates from Problem 5, calculate the...Ch. 11 - Prob. 8PCh. 11 - Suppose two stocks have a correlation of 1. If the...Ch. 11 - Arbor Systems and Gencore stocks both have a...Ch. 11 - Prob. 11PCh. 11 - Suppose Avon and Nova stocks have volatilities of...Ch. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 16PCh. 11 - What is the volatility (standard deviation) of an...Ch. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Suppose Ford Motor stock has an expected return of...Ch. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - A hedge fund has created a portfolio using just...Ch. 11 - Consider the portfolio in Problem 27. Suppose the...Ch. 11 - Prob. 29PCh. 11 - Prob. 30PCh. 11 - You have 10,000 to invest. You decide to invest...Ch. 11 - Prob. 32PCh. 11 - Prob. 33PCh. 11 - Prob. 34PCh. 11 - Prob. 35PCh. 11 - Prob. 36PCh. 11 - Assume all investors want to hold a portfolio...Ch. 11 - In addition to risk-free securities, you are...Ch. 11 - You have noticed a market investment opportunity...Ch. 11 - Prob. 40PCh. 11 - When the CAPM correctly prices risk, the market...Ch. 11 - Prob. 45PCh. 11 - Your investment portfolio consists of 15,000...Ch. 11 - Suppose you group all the stocks in the world into...Ch. 11 - Prob. 48PCh. 11 - Consider a portfolio consisting of the following...Ch. 11 - Prob. 50PCh. 11 - What is the risk premium of a zero-beta stock?...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…arrow_forwardA portfolio has a correlation of 0.40 with the overall market and produces a Sharpe Ratio of 0.2. If the market's volatility is 20%, what is portfolio's *Trevnor ratio* ?arrow_forwardAssume 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.arrow_forward
- The metric that is used to show the extent to which a given stock’s return move up and down with the stock market? a. Correlation b. Beta c. Standard deviation d. Expected returnarrow_forwardIf a given stock in the portfolio had established 1.23 beta; the related expected return is at 11.7percent, and 3.5percent is the current earning of a risk-free asset; a. Determine the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.7, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 9%, what is its beta? d. If a portfolio of the two assets has a beta of 2.46, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Discuss.arrow_forwardTable attached shows the historical returns for Companies A, B and C If one investor has a portfolio consisting of 50% Company A and 50% Company B, what are the average portfolio return and standard deviation? What is Sharpe ratio if the risk-free rate is 3.8%? If another investor has a portfolio consisting of 1/3 Company A, 1/3 Company B and 1/3 Company C, what are the average portfolio return and standard deviation? What is Sharpe ratio if the risk-free rate is 3.8%?arrow_forward
- An analyst gathers the following data: * Expected (estimated) rate of return on the market = 15% * Risk Free Rate = 8% * Expected (estimated) rate of return on stock X = 17% * Stock X's beta = 1.75 Using these data and the capital asset pricing model, which of the following statements about X's stock is true? Stock X is: a. properly valued b. overvalued by 1.75% c. undervalued by 1.40% d. undervalued by 0.25%arrow_forwardSuppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of 21.4%. E [R] SD [R] Johnson & Johnson 6.8% 15.2% Walgreen Company 10.5% 19.8% For a portfolio that is equally invested in Johnson & Johnson's and Walgreen's stock, calculate: a. The expected return. b. The volatility (standard deviation). a. The expected return. The expected return of the portfolio is %. (Round to one decimal place.) b. The volatility (standard deviation). The volatility of the portfolio is %. (Round to one decimal place.)arrow_forwardHow 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%.arrow_forward
- (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return0.20 10% 0.15 -4% 0.60 16% 0.35 7%0.20 21% 0.35 13% 0.15 20% a) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock A? What is the standard deviation? b. Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock B? What is the standard deviation? c. Based on the risk (as measured by the standard deviation) and return of each stock, which…arrow_forwardAssume that the risk-free and rate is 5.50% and the market risk premium is 7.75%. What is the expected return for the overall stock market (rm)?arrow_forward2. Suppose that the market model for stocks A and B is estimated with the following results: RA = 1% +0.9*RM+EA RB = -2% + 1.1*RM+EB The standard deviation of the markets returns is 20% and firm specific risk (standard deviation) equals 30% for A and 10% for B. a. Compute the risk (standard deviation) of each stock and the covariance between them. Suppose we form an equally weighted portfolio of stocks A and B. What will be the nonsystematic standard deviation of that portfolio? b.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Investing For Beginners (Stock Market); Author: Daniel Pronk;https://www.youtube.com/watch?v=6Jkdpgc407M;License: Standard Youtube License