EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 13, Problem 21P
In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%.
- a. What does the
CAPM predict the expected return for each stock should be? - b. Clearly, the CAPM predictions are not equal to the actual expected returns, so the CAPM does not hold. You decide to investigate this further. To see what kind of mistakes the CAPM is making, you decide to regress the actual expected return onto the expected return predicted by the CAPM.49 What is the intercept and slope coefficient of this regression? 49The Excel function SLOPE will produce the desired answers.
- c. What are the residuals of the regression in (b)? That is, for each stock compute the difference between the actual expected return and the best fitting line given by the intercept and slope coefficient in (b).
- d. What is the sign of the correlation between the residuals you calculated in (b) and market capitalization?
- e. What can you conclude from your answers to part b of the previous problem and part d of this problem about the relation between firm size (market capitalization) and returns? (The results do not depend on the particular numbers in this problem. You are welcome to verify this for yourself by redoing the problems with another value for the market risk premium, and by picking the stock betas and market capitalizations randomly.50)
50 The Excel command RAND will produce a random number between 0 and 1.
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Chapter 13 Solutions
EBK CORPORATE FINANCE
Ch. 13.1 - If investors attempt to buy a stock with a...Ch. 13.1 - What is the consequence of investors exploiting...Ch. 13.2 - How can an uninformed or unskilled investor...Ch. 13.2 - Under what conditions will it be possible to earn...Ch. 13.3 - Do investors hold well-diversified portfolios?Ch. 13.3 - Why is the high trading volume observed in markets...Ch. 13.3 - What must be true about the behavior of small,...Ch. 13.4 - What are several systematic behavioral biases that...Ch. 13.4 - Prob. 2CCCh. 13.5 - Prob. 1CC
Ch. 13.5 - Prob. 2CCCh. 13.6 - Prob. 1CCCh. 13.6 - Prob. 2CCCh. 13.7 - Prob. 1CCCh. 13.7 - How can you use the Fama-French-Carhart factor...Ch. 13.8 - Which is the most popular method used by...Ch. 13.8 - Prob. 2CCCh. 13.8 - Prob. 3CCCh. 13 - Assume that all investors have the same...Ch. 13 - Assume that the CAPM is a good description of...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Explain what the following sentence means: The...Ch. 13 - You are trading in a market in which you know...Ch. 13 - Prob. 8PCh. 13 - Your brother Joe is a surgeon who suffers badly...Ch. 13 - Prob. 11PCh. 13 - Suppose that all investors have the disposition...Ch. 13 - Prob. 14PCh. 13 - Prob. 15PCh. 13 - Prob. 16PCh. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Each of the six firms in the table below is...Ch. 13 - Prob. 20PCh. 13 - In Problem 20, assume the risk-free rate is 3% and...Ch. 13 - Prob. 22PCh. 13 - Prob. 23PCh. 13 - Prob. 24PCh. 13 - Explain why if some investors are subject to...Ch. 13 - Prob. 26PCh. 13 - Prob. 27PCh. 13 - You are currently considering an investment in a...Ch. 13 - Prob. 29P
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