Loose-Leaf Essentials of Investments
10th Edition
ISBN: 9781259604966
Author: Kane, Alex, Marcus Professor, Alan J., Bodie Professor, Zvi
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 23C
Download the annual returns on the combined NYSE/NASDAQ/AMEX markets as well as the S&P 500 from Connect. For both indexes, calculate: (LO 5-2)
- Average return.
- Standard deviation of return.
- Skew of return.
- Kurtosis of return.
- The 5% value at risk.
- Based on your answers to parts (b)-(e), compare the risk of the two indexes.
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PLEASE ANSWER ALL THE QUESTIONS
Question 1
Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items.
Question 2
Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph
Question 3
From the information generated in the previous two questions;
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative.
b) Compute the expected return of the portfolio thus formed.
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
Suppose that three stocks (A, B, and C} and two common risk factors (1 and 2) have the following relationship:
E(RA) = (1.1)A1 + (0.8)A2
E(RB) = (0.7)A1 + (0.6)A2
E(RC) = (0.3)A1 + (0.4)A2
a. If A1 = 4 percent and A2 = 2 percent, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year.
b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale. Problems 13 and 14 refer to the data contained in Exhibit 7.23, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). {Note: You may find it…
Astromet is financed entirely by common stock and has a beta of 1.20. The firm pays no taxes. The stock has a price-earnings multiple
of 11.0 and is priced to offer a 10.9% expected return. The company decides to repurchase half the common stock and substitute an
equal value of debt. Assume that the debt yields a risk-free 4.6%. Calculate the following:
Required:
a. The beta of the common stock after the refinancing
b. The required return and risk premium on the common stock before the refinancing
c. The required return and risk premium on the common stock after the refinancing
d. The required return on the debt
e. The required return on the company (i.e, stock and debt combined) after the refinancing
If EBIT remains constant:
f. What is the percentage increase in earnings per share after the refinancing?
g-1. What is the new price-earnings multiple?
g-2. Has anything happened to the stock price?
Complete this question by entering your answers in the tabs below.
Reg A to E
Reg F to G2…
Chapter 5 Solutions
Loose-Leaf Essentials of Investments
Ch. 5 - Prob. 1PSCh. 5 - Prob. 2PSCh. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - Download the annual returns on the combined...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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