CORPORATE FINANCE
CORPORATE FINANCE
12th Edition
ISBN: 9781307702804
Author: Ross
Publisher: MCG/CREATE
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Chapter 11, Problem 22QAP

a

Summary Introduction

Adequate information:

Probability in Boom PBo = 0.20

Probability in Normal PNo = 0.55

Probability in Bust PBu = 0.20

Expected return for Stock A in Boom RABo = 0.25

Expected return for Stock A in Normal RANo = 0.18

Expected return for Stock A in Bust RABu = 0.03

Expected return for Stock B in Boom RBBo = 0.35

Expected return for Stock B in Normal RBNo = 0.13

Expected return for Stock B in Bust RBBu = -0.18

Expected return for Stock C in Boom RCBo = 0.40

Expected return for Stock C in Normal RCNo = 0.03

Expected return for Stock C in Bust RCBu = -0.45

Weight of Stock A WA = 0.40

Weight of Stock B WB = 0.40

Weight of Stock C WC = 0.20

To compute: Portfolio expected return, variance, and standard deviation

Introduction: Expected return on the portfolio refers to the return expected on the investment portfolio. Portfolio variance is a statistical metric used to measure the dispersion of returns. Standard deviation refers to the measurement of the dispersion of actual returns from average returns.

b

Summary Introduction

Adequate information:

Expected T-bill rate Tr = 0.038

To compute: Expected risk premium

Introduction: Risk premium refers to the return in addition to the risk-free rate for bearing extra risk by the investor.

c

Summary Introduction

Adequate information:

Expected inflation rate Ir = 0.035

To compute: Approximate and exact expected real returns and risk premiums

Introduction: Real rate of return refers to the actual returns on the investment. Risk premium refers to the return in addition to the risk-free rate for bearing extra risk by the investor.

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Chapter 11 Solutions

CORPORATE FINANCE

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