Adequate information: Probability in bust (P B U ) = 0.15 Probability in normal (P N O ) = 0.60 Probability in boom (P B 0 ) = 0.25 Expected return for stock A in Bust (R (A) B U ) = -0.13 Expected return for stock A in Normal (R (A) N O ) = 0.12 Expected return for stock A in Boom (R (A) B O ) = 0.34 Expected return for stock B in Bust (R (B) B U ) = -0.11 Expected return for stock B in Normal (R (B) N O ) = 0.10 Expected return for stock B in Boom (R (B) B O ) = 0.31 To compute: Expected return on each stock Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

Question

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Answer 1

Question

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Answer 2

Question

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

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Answer 3

Question

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

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Answer 4

Question

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

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Answer 5

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

Answer 6

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

Answer 7

Chapter 11, Problem 36QAP

a.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: Expected return on each stock

Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.

Answer 8

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

Answer 9

b.

Summary Introduction

Adequate information:

Probability in bust (P_B_U) = 0.15

Probability in normal (P_N_O) = 0.60

Probability in boom (P_B₀) = 0.25

Expected return for stock A in Bust (R (A) _B_U) = -0.13

Expected return for stock A in Normal (R (A) _N_O) = 0.12

Expected return for stock A in Boom (R (A) _B_O) = 0.34

Expected return for stock B in Bust (R (B) _B_U) = -0.11

Expected return for stock B in Normal (R (B) _N_O) = 0.10

Expected return for stock B in Boom (R (B) _B_O) = 0.31

To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.

Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQ Ch. 11 - Prob. 9CQ Ch. 11 - Prob. 10CQ

Solution Summary: The author explains that expected return on stock refers to the return a stock likely to generate at the future date.

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