PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
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Chapter 7, Problem 3PS
Arithmetic average and compound returns* Integrated Potato Chips (IPC) does not pay a dividend. Its current stock price is $150 and there is an equal probability that the return over the coming year will be –10%, +20%, or +50%.
- a) What is the expected price at year-end?
- b) If the probabilities of future returns remain unchanged and you could observe the returns of IPC over a large number of years, what would be the (arithmetic) average return?
- c) If you were to discount IPG’s expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s
present value ? - d) If you could observe the returns of IPC over a large number of years, what would be the compound (geometric average)
rate of return ? - e) If you were to discount IPC's expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s present value?
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Chapter 7 Solutions
PRINCIPLES OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...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 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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