11th Edition

ISBN: 9781260316193

Author: Bodie

Publisher: MCG

Concept explainers

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for …

Videos

Textbook Question

Chapter 7, Problem 25PS

Suppose the yield on short-term government securities (perceived o he risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: (LO 7-2)
a. What is the expected return on the market portfolio?
b. What would be the expected return on a zero-beta stock?
c. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at B = −.5. Is he stock overpriced or underpriced?

Expert Solution & Answer

Chapter 7 Solutions

Essentials Of Investments

Ch. 7 - Prob. 1PS Ch. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...

Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PS Ch. 7 - Prob. 14PS Ch. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PS Ch. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PS Ch. 7 - Prob. 19PS Ch. 7 - Prob. 20PS Ch. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PS Ch. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PS Ch. 7 - Prob. 30PS Ch. 7 - Et Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CP Ch. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CP Ch. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CP Ch. 7 - Prob. 8CP Ch. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CP Ch. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WM Ch. 7 - Prob. 2WM Ch. 7 - Prob. 3WM Ch. 7 - a. Which of the stocks would you classify as...

Knowledge Booster

Learn more about

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.