Loose Leaf for Corporate Finance Format: Loose-leaf
12th Edition
ISBN: 9781260139716
Author: Ross
Publisher: Mcgraw Hill Publishers
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Chapter 11, Problem 37QAP
a.
Summary Introduction
Adequate information:
| Price of Stock A today (P0) | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 (P1) | 0.20 (PR) |
| Normal | $87 (P2) | 0.60 (PN) |
| Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (?A,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 18%
To compute: Which stock would be preferred by an investor, if the investor is risk-averse?
Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.
b.
Summary Introduction
Adequate information:
| Price of Stock A today (P0) | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 (P1) | 0.20 (PR) |
| Normal | $87 (P2) | 0.60 (PN) |
| Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (ρA,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 30% or 0.30
To compute: The expected return and standard deviation of the portfolio.
Introduction: Expected return simply refers to the return that is anticipated on the investment.
c.
Summary Introduction
Adequate information:
| Price of Stock A today | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 | 0.2 |
| Normal | $87 | 0.6 |
| Expanding | $97 | 0.2 |
Stock A correlation with market = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market = 0.24
Stock B correlation with Stock A = 0.36
Market standard deviation = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 30% or 0.30
To compute: Beta of the portfolio
Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.
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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?
Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s).
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Chapter 11 Solutions
Loose Leaf for Corporate Finance Format: Loose-leaf
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. 8CQCh. 11 - Prob. 9CQCh. 11 - Prob. 10CQ
Ch. 11 - Determining Portfolio Weights What are the...Ch. 11 - Portfolio Expected Return You own a portfolio that...Ch. 11 - Prob. 3QAPCh. 11 - Portfolio Expected Return You have 10,000 to...Ch. 11 - Prob. 5QAPCh. 11 - Prob. 6QAPCh. 11 - Calculating Expected Returns A portfolio is...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Calculating Portfolio Betas You own a stock...Ch. 11 - Calculating Portfolio Betas You own a portfolio...Ch. 11 - Using CAPM A stock has a beta of 1.15, the...Ch. 11 - Prob. 13QAPCh. 11 - Prob. 14QAPCh. 11 - Prob. 15QAPCh. 11 - Using CAPM A stock has a beta of 1.08 and an...Ch. 11 - Prob. 17QAPCh. 11 - Reward-to-Risk Ratios Stock Y has a beta of 1.15...Ch. 11 - Prob. 19QAPCh. 11 - Portfolio Returns Using information from the...Ch. 11 - Prob. 21QAPCh. 11 - Prob. 22QAPCh. 11 - Analyzing a Portfolio You want to create a...Ch. 11 - Prob. 24QAPCh. 11 - Prob. 25QAPCh. 11 - Prob. 26QAPCh. 11 - Prob. 27QAPCh. 11 - Prob. 28QAPCh. 11 - Prob. 29QAPCh. 11 - Prob. 30QAPCh. 11 - Prob. 31QAPCh. 11 - Prob. 32QAPCh. 11 - Prob. 33QAPCh. 11 - Prob. 34QAPCh. 11 - Prob. 35QAPCh. 11 - Prob. 36QAPCh. 11 - Prob. 37QAPCh. 11 - Prob. 38QAPCh. 11 - Prob. 1MCCh. 11 - Prob. 2MC
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