EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 11, Problem 20PS
Summary Introduction
To select: The Company that won the lawsuit.
Introduction : The return rate basically measures the loss or gain of the company by comparing the values. It effects by the market index, value of beta, and fluctuations in the prices.
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In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.9%. The rate of return on Bpex was only rB = 3.5%. The market today responded to very encouraging news about the unemployment rate, and rM = 3.6%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as:
Apex: rA = 0.3% + 1.1rM
Bpex: rB = −0.1% + 0.7rM
a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
b. Which company do you think won the lawsuit?
Apex
Bpex
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of
return on Apex was rд = 3.2%. The rate of return on Bpex was only r = 2.6%. The market today responded to very encouraging news
about the unemployment rate, and = 3%. The historical relationship between returns on these stocks and the market portfolio has
been estimated from index model regressions as:
Apex: A = 0.5% + 1.6rM
Bpex: r = -0.1% +0.4rM
a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
Apex
Bpex
Predicted Returns
%
%
b. Which company do you think won the lawsuit?
Apex
O Bpex
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of
return on Apex was rд = 3.7%. The rate of return on Bpex was only r = 3.1%. The market today responded to very encouraging news
about the unemployment rate, and = 3.4%. The historical relationship between returns on these stocks and the market portfolio has
been estimated from index model regressions as:
Apex: A = 0.4% + 1.4rM
Bpex: rB = -0.1% + 0.7rM
a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
Apex
Bpex
Predicted Returns
%
%
Chapter 11 Solutions
EBK INVESTMENTS
Ch. 11 - Prob. 1PSCh. 11 - Prob. 2PSCh. 11 - Prob. 3PSCh. 11 - Prob. 4PSCh. 11 - Prob. 5PSCh. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Prob. 9PSCh. 11 - Prob. 10PS
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- In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.1%. The rate of return on Bpex was only r3 = 2.5%. The market today responded to very encouraging news about the unemployment rate, and = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as: Apex: ra Вpex: r B = -0.1% + 0.8rM a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Apex Bpex = 0.5% + 1.1rM Predicted Returns % % b. Which company do you think won the lawsuit? Apex O Bpexarrow_forwardplease give me the corect answerarrow_forwardYou ran a regression of the excess return on Walmart's stock on the excess return on the market. You found the following: alpha=1.5%, beta-2.818, R^2=0.623. If Walmart's total volatility was 0.310 in that same period, what must have been the markets volatility in that same period.arrow_forward
- Please help with this question with full working out.arrow_forwardConsider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?arrow_forwardWhich one of the following would provide evidence against the semistrong form of the efficient market theory?a. About 50% of pension funds outperform the market in any year.b. All investors have learned to exploit management signals about the future performance of the firm.c. Trend analysis is worthless in determining stock prices.d. Low P/E stocks tend to have positive abnormal returns over the long run.arrow_forward
- An index model regression applied to past monthly returns in Ford’s stock price produces the following estimates, which are believed to be stable over time: rF = 0.1% + 1.1rM If the market index subsequently rises by 7.3% and Ford’s stock price rises by 7%, what is the abnormal change in Ford’s stock price? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.).arrow_forwardBlue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent respectively. What is the standard deviation of the returns on this stock? Can the calculator an excel solution be provided?arrow_forwardStruggling on these - please help Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca-cola. Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B)arrow_forward
- An index model regression applied to past monthly returns in Ford's stock price produces the following estimates, which are believed to be stable over time: rF = 0.1% + 1.1rM If the market index subsequently rises by 9.0% and Ford's stock price rises by 9%, what is the abnormal change in Ford's stock price? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Abnormal return %arrow_forwardWhich of the following statements is most correct? Why?* a. If a market is weak-form efficient, this means that prices rapidly reflect all available public information. b. If a market is weak-form efficient, this means that you can expect to beat the market by using technical analysis that relies on the charting of past prices. c. If a market is strong-form efficient, this means that all stocks should have the same expected return. d. All of the statements above are correct. c. None of the statements above is correct.arrow_forwardThe index model has been estimated using historical excess return data for stocks A, B, and C, with the following results: RA = 0.02 + 0.9RM + eA RB = 0.04 + 1.2RM + eB RC = 0.10 + 1.ORM + eC OM oM = 0.22 o(eA) = 0.21 o(eB ) = 0.11 o(eC ) = 0.23 a. What are the standard deviations of stocks A, B, and C? b. Break down the variances of stocks A, B, and C into their systematic and firm-specific components. c. What is the covariance between the returns on each pair of stocks? d. What is the covariance between each stock and the market index?arrow_forward
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