INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 5, Problem 7CP
Summary Introduction
To calculate:
: The expected return is sum of weighted average of stock returns in different market conditions like good market, normal and poor market. Probability here counts for the weights that can be assigned to the returns.
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How can the model be used to estimate the predicted return ona stock?
Let's explore the difference between "expected" and "actual" return of a stock.
1) How might we calculate what the expected return of a stock should be?
2) How might we calculate the "actual" return of a stock?
Determine whether stock prices are affected more by long-term or short-term performance. Provide an example of the effect that supports your claim.
Chapter 5 Solutions
INVESTMENTS(LL)W/CONNECT
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What does the capital asset pricing model (CAPM) calculate? a. The expected rate of return on an individual stock with respect to the risk-free rate of return b. The expected rate of return of an individual stock based on its overall risk c. The expected rate of return of an individual stock with respect to its market risk only d. The expected rate of return of an individual stock reflecting its financial risk Clear my choicearrow_forwardWhy might the stock price changing make sense within the context of risk and return?arrow_forwardHow does the Efficient Market Hypothesis (EMH) explain stock price behavior, and what are the implications for investors? Describe the three forms of EMH and discuss whether active or passive management is more suitable in light of this theory.arrow_forward
- 1. What effect does increasing inflation expectations have on the required returns of investors in common stock? 2. Explain the specific relationship between risk and reward and why this relationship must be true.arrow_forwardHow would you use these to evaluate whether or not a current stock price is perhaps to high (overpriced) or too low (underpriced).arrow_forwardSelect the best answer with respect to a stock's "alpha"? (In a CAPM world) Group of answer choices The expected return on an asset relative to the expected return on the market The expected return on an asset relative to the riskiness of the asset The expected return on an asset relative to the risk free rate The expected return on an asset relative to what CAPM predicts for the asset's expected returnarrow_forward
- To estimate the required rate of return on a stock we can use the Capital Asset Pricing Model (CAPM) or the Discount Dividends Model. How we can decide which model to use? Explain.arrow_forwardWhich of the following is needed to calculate a firm’s WACC? A. the cost of carrying inventory B. the amount of capital necessary to make the investment C. the cost of preferred stock D. the probability distribution of expected returns E. both b and carrow_forwardWhat is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forward
- When all investors have the same information and care only about expected return and volatility; if new information arrives about one stock, can this information affect the price and return of other stocks?arrow_forwardDiscuss the importance of market efficiency and explain why some markets are more efficient than others. •Explain the distinction between a stock's price and its intrinsic value, then discuss the two models that can be used to estimate a stock's intrinsic value.arrow_forwardThe additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stockarrow_forward
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