Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 7, Problem 19PS
Stock betas There are few, if any, real companies with negative betas. But suppose you found one with β = –.25.
- a. How would you expect this stock’s
rate of return to change if the overall market rose by an extra 59%? What if the market fell by an extra 5%?
You have $1 million invested in a well-diversified portfolio of stocks. Now you receive an additional $20,000 bequest. Which of the following actions will yield the safest overall portfolio return?
- i. Invest $20,000 in Treasury bills (which have β = 0).
- ii. Invest $20,000 in stocks with β = 1.
- iii. Invest $20,000 in the stock with β = –.25.
Explain your answer.
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Assume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock. Your research shows the following:
Beta = βi = 1.54
Risk free rate = Rf = 2.5% per year
Market return = E(RM) = 6.5% per year
Based on this information, answer the following:
A. Based on the beta, how does the stock's risk compare to the market overall? On what do you base your answer?
B. Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall? Why?
C. According to the CAPM and the information given above, what is the expected return E(Ri) for this stock?
D. If the required rate of return on this stock were 7% per year, would you invest? Why or why not?
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Chapter 7 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Portfolio risk True or false? a. Investors prefer...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.9 shows standard deviations...Ch. 7 - Portfolio risk Your eccentric Aunt Claudia has...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio risk You can form a portfolio of two...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...Ch. 7 - Beta Calculate the beta of each of the stocks in...
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