Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 7CP
Use the following scenario analysis for stocks X and Y to answer CFA Questions 7 through 9.
Bear Market Normal Market Bull Market Probability 0.2 0 3 Stock X –20% 18% 50% Stock Y –95% 20% 10%
7. What are the expected returns for stocks X and Y? (LO 5-2)
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Consider the following simplified APT model: Factor Expected Risk Premium
Market 6.4%
Interest Rate -0.6%
Yield Spread 5.1% Factor Risk Exposures
Market Interest Rate Yield Spread Stock Stock (b1) (b2) (b3)
P 1.0 -2.0 -0.2
P2 1.2 0 0.3
P3 0.3 0.5 1.0 a) Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal…
Question 1
Suppose you have the following expectations about the market condition and the returns on Stocks X and Y.
Market Condition
Probability
Return on Stock X
Return on Stock Y
Bear Market
0.3
-3%
-5%
Normal Market
0.5
3%
5%
Bull Market
0.2
8%
15%
a) What are the expected returns for Stocks X and Y, E(rX) and E(rY)?
b) What are the standard deviations of the returns for Stocks X and Y, σX and σY?
And what are the expected returns for stocks A and B if the conditions are as follows?
A0
0.03
k1
0.09
k2
0.07
ba,1
1.5
ba,2
0.8
bb,1
1.2
bb,2
0.6
Chapter 5 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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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- Vijayarrow_forwardConsidering these data where 'P1' estimates are analyst forecasts of future stock prices: Stock PO 48.5 0.18 2.4 25 27 0.4 1.1 33.95 39 0.2 1.3 40 47 0.26 1.6 ABCD Market Risk Premium 0.0525 T-bill rate 0.04 P1 O B 57 Assuming the analyst forecast is correct, what is the abnormal return (alpha) relative to the CAPM E(r) for Stock: B? O-0.01780 O-0.01698 -0.01622 O-0.01524 O-0.01873arrow_forwardConsider the following simplified APT model: Factor Market Expected Risk Premium (%) Interest rate Yield spread 6.2 -0.8 4.8 Factor Risk Exposures Market ( Interest Rate ( Yield Spread ( Stock b₁ ) P 1.0 p2 1.0 p3 0.3 b2 ) -1.4 0 2.1 b3 ) -0.6 0.1 0.6 = : 3.8%. Calculate the expected return for each of the stocks shown in the table above. Assume rf Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Expected return P 7.80% Expected return P2 10.38% Expected return P3 %arrow_forward
- What are the expected returns for stocks Y and Z under the conditions shown below? A0 0.04 k1 0.07 k2 0.05 by,1 0.5 by,2 1.3 bz,1 1.2 bz,2 0.9arrow_forward2. Calculate the expected (required) return for each of the following stocks when the risk-free rate is 0.08 and you expect the market return to be 0.14. Stock Beta B C A P ש ח ס ח D E 1.72 1.14 0.76 F 0.44 0.03 -0.79arrow_forward1arrow_forward
- 3. The following information is given with respect to stock A: Scenario Probability Market return 1 0.1 -0.18 2 0.3 0.07 3 0.4 0.16 4 0.2 0.21 Knowing that the Rfis 0.07 compute alpha and the information ratio. Portfolio P return -0.32 0.00 0.22 0.40arrow_forwardThe following three stocks are available in the market: E(R) β Stock A 11.0 % 1.32 Stock B 14.2 1.12 Stock C 16.7 1.52 Market 14.6 1 Assume the market model is valid. a. The return on the market is 15.4 percent and there are no unsystematic surprises in the returns. What is the return on each stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Assume a portfolio has weights of 30 percent Stock A, 45 percent Stock B, and 25 percent Stock C. The return on the market is 15.4 percent and there are no unsystematic surprises in the returns. What is the return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardWhich one of the following stocks is correctly priced if the risk-free rate of return is 3.0 percent and the market risk premium is 7.5 percent? Expected Return 8.46% Stock A B с D E 0000С Stock A O Stock D Stock C O Stock E Beta 77 1.46 1.27 1.44 .95 Stock B 12.47 11.19 13.80 8.65arrow_forward
- 2arrow_forwardSuppose you have the following expectations about the market condition and the returns on Stocks X and Y. a) What are the expected returns for Stocks X and Y, E(rX) and E(rY)? b) What are the standard deviations of the returns for Stocks X and Y, σX and σY?arrow_forwardi) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.arrow_forward
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