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 7, Problem 3PS
Are the following true or false? Explain. (LO 7-5)
a. Stocks with a beta of zero offer an expected
b. The
e. You can construct a portfolio with a beta of 0.75 by investing 0.75 of the investment budget in T-bills and the remainder in the market portfolio.
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Students have asked these similar questions
Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:
Stock
A
B
Expected Return
9%
19
Correlation = -1
Standard Deviation
5%
12
Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about
constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal
places.)
Risk-free rate
%
Use the figure for the question(s) below.
Consider the following graph of the security market line:
Average
excess
return (%)
12
10
Portfolio "A"
8
Portfolio "B"
6
Portfolio "C"
4
Market Portfolio
2
Portfolio "D"
2 Beta
Portfolio "B":
O A. falls above the SML.
O B. is overpriced.
OC. has a positive alpha.
O D. is less risky than the market portfolio.
Which of the following statements is TRUE?
O A. If the risk-free rate is 1.5% and the market risk premium is 6%, then the expected return on the market would be 4.5%.
O B. CAPM is a model for relating unsystematic risk to the expected return on an asset.
OC. According to CAPM, stocks with greater than average market risk would have an expected return lower than the expected return on the market.
O D. If a company's beta is less than 1.0, then it is less risker than market.
Chapter 7 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Prob. 1PSCh. 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 - Prob. 8PSCh. 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. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 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. 29PSCh. 7 - Prob. 30PSCh. 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. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 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. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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- 2C) Assume that the CAPM holds in the economy. The following data is available about the market portfolio, the riskless rate, and two risky assets, W and X: The market portfolio has a standard deviation equals to 10%, stock W has an expected return equals to 16%, standard deviation equals to 12%, and beta equals to one, stock X has a standard deviation equals to 6% and beta equals to 0.7. The risk-free rate is 3%. What is the expected return and the beta of the market portfolio? What is the expected return on asset X? Does asset W lie on the Capital Market Line? Explain why or why not. Suppose you invested $100,000 in these two stocks. The beta of your portfolio is 1.25. How much did you invest in each stock? What is the expected return of this portfolio?arrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return Standard Deviation 12% 19 Correlation = -1 3% 9 Suppose that it is possible to borrow at the risk-free rate, r. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B. Since they have a perfect negative correlation, the rate of return will be the r Note: Do not round intermediate calculations. Round your answer to 3 decimal places. Risk-free rate %arrow_forwarda) Suppose the risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results b)Stock 1 has a standard deviation of return of 6%. Stock 2 has a standard deviation of return of 2%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question b) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of…arrow_forward
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- Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 11% 17 Correlation -1 Risk-free rate Standard Deviation 6% 9 Suppose that it is possible to borrow at the risk-free rate, r. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.) %arrow_forwardIndicate whether the following statements are true or false. a. Investors demand higher expected rates of return on stocks with more variable rates of return. multiple choice 1 True False b. The CAPM predicts that a security with a beta of 0 will offer a zero expected return. multiple choice 2 True False c. An investor who puts $10,000 in Treasury bills and $20,000 in the market portfolio will have a beta of 2.0. multiple choice 3 True False d. Investors demand higher expected rates of return from stocks with returns that are highly exposed to macroeconomic risks. multiple choice 4 True False e. Investors demand higher expected rates of return from stocks with returns that are very sensitive to fluctuations in the stock market. multiple choice 5 True Falsearrow_forwardAssume CAPM holds. What is the correlation between an efficient portfolio and market portfolio? a. 1 b.-1 c.0 d. Not enough information Assume CAPM holds. The risk-free rate is 1% and the expected return on the portfolio is 5%. What is the expected return of a stock with a beta of 2? 70%arrow_forward
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