Adequate information: Price of Stock A today (P 0 ) $75 Price of Stock A in Next Year Probability Recession $64 (P 1 ) 0.20 (P R ) Normal $87 (P 2 ) 0.60 (P N ) Expanding $97 (P 3 ) 0.20 (P E ) Stock A correlation with market (? A , M ) = 0.70 Expected return on Stock B [E(R B )] = 14% Standard deviation of Stock B (σ B ) = 34% Stock B correlation with market (ρ B , M ) = 0.24 Stock B correlation with Stock A (ρ B , A ) = 0.36 Market standard deviation (σ M ) = 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.

Question

Want to see the full answer?

Answer 1

Question

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

King’s Park, Trinidad is owned and operated by a private company,Windy Sports Ltd. You work as the Facilities Manager of the Park andthe CEO of the company has asked you to evaluate whether Windy shouldembark on the expansion of the facility given there are plans by theGovernment to host next cricket championship.The project seeks to increase the number of seats by building fournew box seating areas for VIPs and an additional 5,000 seats for thegeneral public. Each box seating area is expected to generate $400,000in incremental annual revenue, while each of the new seats for thegeneral public will generate $2,500 in incremental annual revenue.The incremental expenses associated with the new boxes and seatingwill amount to 60 percent of the revenues. These expenses includehiring additional personnel to handle concessions, ushering, andsecurity. The new construction will cost $15 million and will be fullydepreciated (to a value of zero dollars) on a straight-line basis overthe 5-year…

You are called in as a financial analyst to appraise the bonds of Ollie’s Walking Stick Stores. The $5,000 par value bonds have a quoted annual interest rate of 8 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 12 years to maturity. a. Compute the price of the bonds based on semiannual analysis. b. With 8 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds?

Lonnie is considering an investment in the Cat Food Industries. The $10,000 par value bonds have a quoted annual interest rate of 12 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. There are seven years to maturity. Compute the price of the bonds based on semiannual analysis.

Answer 2

Question

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 3

Question

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 4

Question

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 5

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 6

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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.

Answer 7

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 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.

Answer 8

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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.

Answer 9

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 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 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.

Answer 10

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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 11

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(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 12

Expert Solution & Answer

Answer 13

Expert Solution & Answer

Answer 14

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 15

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 systematic risk is measured by the value of beta. The higher the beta, the greater the systematic risk.

Want to see the full answer?

Chapter 11 Solutions

Price of Stock A today (P₀)	$75
	Price of Stock A in Next Year	Probability
Recession	$64 (P₁)	0.20 (P_R)
Normal	$87 (P₂)	0.60 (P_N)
Expanding	$97 (P₃)	0.20 (P_E)

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