Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 8, Problem 4PS
Summary Introduction
To discuss: Alpha as a nonmarket return premium and reason for considering investments with high alpha. Also, the effect of increase in alpha on Sharpe ratio needs to be discussed.
Introduction: An investor may invest in various stocks to reduce the risk of losses. Such a theory is called correlation theory. It is believed that an investor takes a lot of risk to achieve higher
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The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium.
.....
True
False
According to the capital asset pricing model (CAPM), fairly priced securities should have __________.
Select one:
a.
A fair return based on the level of systematic risk.
b.
A beta of 1.
c.
A return equal to the market return.
d.
A fair return based on the level of unsystematic risk.
true or false
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- Consider the following single factor specification: R₁ = a¡ + ßi, Rµ + €i. Where R; is the return on security i, RM is the return on index M (a broad market index) and e, is a zero- mean white noise random variable not correlated with anything. Assume that the single factor specification above correctly describes the return generating processes of all securities. Furthermore, you have the following descriptive statistics for returns of well-diversified Portfolios X, Y, and index M. Portfolio X Portfolio Y Index M Risk-Free Expected return 14% 17% ?? ?? B₁ 1.2 1.6 1 0 a. Assume that the corresponding single factor APT correctly prices Portfolios X and Y. In other words, the expected returns of Portfolios X and Y shown above - 14% and 17% respectively - are equal to their APT-predicted expected returns. Calculate the expected return of Index M and risk-free rate. b. Another well-diversified portfolio Z has a beta, ßz, of 0.8 while its expected return is 10%. Form a portfolio consisting…arrow_forwardWhich of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.arrow_forward2. Which of the following statements is/are correct: Beta accounts for the risk of the securities portfolio for a diversified investor Market rate of return accounts for the risk of the securities portfolio for a marginal investor Equity risk premium is the incremental return expected by a marginal investor from a specific equity instrument to be added into his/her portfolio of securities. Risk-free rate used in CAPM can be a short-term or long-term rate depending on the tenor of the equity instrument Group of answer choices Statements 2 and 3 are correct Statement 2 only Statements 1, 2 and 3 are correct All statements are correctarrow_forward
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