INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Chapter 18, Problem 3PS
Summary Introduction
To determine: The relationship between the market capitalization rate and its expected
Introduction:
The market capitalization can be defined as the value of the company which is traded on stock market and this can be calculated by the product of total number of shares and current price of share.
The expected rate of return can be defined as the amount of percentage return which is earned by the investor in certain period of time. The expected rate of return is the
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If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?
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Using a graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model.
Chapter 18 Solutions
INVESTMENTS-CONNECT PLUS ACCESS
Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - Prob. 4PSCh. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Prob. 8PSCh. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 5CPCh. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CP
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- Which is least likely correct about security valuation?a. The calculated or determined value considers the stream of future cash flows.b. The calculated or determined value equals the market price.c. The calculated or determined value considers the risks involved and the opportunity cost.d. The calculated or determined value allows the investors to evaluate whether a security isovervalued or undervalued.e. All of the abovearrow_forwardDefine the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the nominalrisk-free rate (rRF)? What securities can be used asestimates of rRF?arrow_forwardQuestion: Market Value 1. What kinds of liabilities are there in the market to be purchased?arrow_forward
- The maximum rate of return needed to induce an investor to purchase or hold a security is referred to as the investor's required rate of return. OTRUE. FALSEarrow_forwardWhat is definitions of this? Systematic risk Risk free rate of return Market rate of return, and Risk premium.arrow_forwardConsider the Security Market Line (SML). What determines its vertical intercept? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?arrow_forward
- What is security Market Line (SML)? How it explains risk-return relationship? Explain different scenarios where the changes in SML occurs?arrow_forwardWhat is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of return.c. Negative rate of return.d. Risk-free rate of return.arrow_forwardDetermine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. . Determine how the appropriate yield to be offered on a security is affected by a higher default risk premium. Explain the logic of this relationship.arrow_forward
- An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnarrow_forwardIn the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. the level of the security market line the slope of the security market line the difference between the beta and the risk-free rate the risk-free ratearrow_forwardAccording to the CAPM (capital asset pricing model), and the security market line is a straight line.What does the slope of this line (Rise / Run) represent?arrow_forward
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