Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 12, Problem 5CRCT
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Critically evaluate the following statement:
QUESTION 1
Exhibit 5.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock
Rit
Rmt
ai
Beta
A
10.6
15
0
0.8
Z
9.8
8.0
0
1.1
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)?
a.
4.40
b.
−1.70
c.
3.40
d.
−4.40
e.
−1.86
Chapter 12 Solutions
Fundamentals of Corporate Finance
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- LO1 7. Calculating Returns and Standard Deviations Based on the following information, calculate the expected returns and standard deviations for the two stocks. Page 388 State of Economy Recession Normal Boom Probability of State Rate of Return if State Occurs of Economy Stock A Stock B .15 -.17 .55 .12 .30 .27 .04 .09 .17arrow_forwardQ1)VaR can be defined as the minimal loss of a financial position during a given time period for a given probability. true or fslse Q2 Stocks tend to move together if they are affected by ________. common economic events events unrelated to the economy idiosyncratic shocks unsystematic risk Q3)Beta can be viewed as a measure of systematic risk TRUE OR FASEarrow_forwardQ4arrow_forward
- 20. When we are studying the stock price reactions to earnings announcement, why do we need to know analysts’ earnings forecast consensus?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_forwardA4 6 b b. Suppose we observe two stocks with the following characteristics: Stock Expected return Beta M 20% 1.6 N 12% 0.9 An asset is said to be undervalued if its price is too low given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks undervalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not undervalued).arrow_forward
- V5arrow_forwardwhich one is correct? QUESTION 8 Exhibit 7.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks. Current Expected Expected Stock Beta Price Price Dividend X 1.25 $20 $23 $1.25 Y 1.50 $27 $29 $0.25 Z 0.90 $35 $38 $1.00 Refer to Exhibit 7.2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)? a. 21.25 percent, 8.33 percent, 11.43 percent b. 16.50 percent, 5.50 percent, 22.00 percent c. 15.00 percent, 3.50 percent, 7.30 percent d. 6.20 percent, 2.20 percent, 8.20 percent e. 9.25 percent, 10.5 percent, 7.5 percentarrow_forwardQUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68arrow_forward
- Can you assist with question 7.arrow_forwardUsing CAPM [LO4] A stock has a beta of 1.35 and an expected return of 16 percent. A risk free asset currently earns 4.8 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights How do you interpret the weights for the two assets in this case? Explain.arrow_forwardA stock market analyst is using a exponential smoothing and wanting to give a quick read out on a stock their firm is looking to invest in. The analyst finds that their last predicted closing price on the stock was below the actual price. What should the analyst know about their next prediction on the closing price of the stock? Otheir next forecast will be Otheir next forecast will be more than their latest prediction. O their next forecast will be greater than the actual price their next forecast will be less than their latest prediction. less than the actual pricearrow_forward
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