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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Textbook Question
Chapter 8, Problem 6PS
- a. Calculate the expected return from Johnson & Johnson.
- b. Find the highest expected return that is offered by one of these stocks.
- c. Find the lowest expected return that is offered by one of these stocks.
- d. Would U.S. Steel offer a higher or lower expected return if the interest rate were 6% rather than 2%? Assume that the expected market return stays at 9%.
- e. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%?
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Dhofar Energy Services has a Beta = 1.18 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return?
Select one:
a. 0.2149
b. 0.1821
c. 0.2169
d. 1.1381
e. All the given choices are not
correct
Suppose the CAPM is true. Consider two
assets, X and Y, and the market M. Suppose
cov(X,M) = .3, cov(Y,M) = .5.
%3D
(a) Is the expected return higher on X or Y?
(b) Suppose var(M) = 1.5, what are the betas
of X and Y?
(c) Suppose the expected market return is
20% and the risk free rate is 5%, what is the
expected returns of X and Y?.
(d) Given your analysis in (a)-(c), what type
of investor would prefer asset X to asset Y?
Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table 12.1, and the expected return on the market is 9%. Use the betas in that table to answer the following questions.
a. When you assume this higher risk-free interest rate, what makes sense for how you should modify your assumption about the rate of return on the market portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
b. Recalculate the expected return on the stocks in Table 12.1. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
c. Suppose now that you continued to assume that the expected return on the market remained at 9%. Now what would be the expected returns on each stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)d. Ford offer a higher or lower expected return if the interest rate is 6% rather than 3%?
e. Walmart offer a higher or…
Chapter 8 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - CAPM True or false? Explain or qualify as...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...
Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Prob. 21PSCh. 8 - Prob. 22PSCh. 8 - Prob. 23PSCh. 8 - Efficient portfolios Look again at the set of the...
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- Dhofar Energy Services has a Beta = 0.93 The risk - free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2193 b. 0.2634 c. 0.2039 d. 1.1753 e. All the given choices are not correctarrow_forwardSee Attachedarrow_forwardConsider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta Factor Risk Premium Inflation 1.1 9% Industrial production 0.7 11 Oil prices 0.3 7 Required: If T - bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. Factor Expected Value Actual Value Inflation 7 % 3% Industrial production 6 7 Oil prices 4 0 Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place.arrow_forward
- Consider the following multifactor (APT) model of security returns for a particular stock. Factor Inflation Industrial production Oil prices Expected rate of return Factor Beta 1.8 1.3 0.9 a. If T-bills currently offer a 9% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Factor Inflation Industrial production Oil prices Expected rate of return % b. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Expected Value 5% Factor Risk Premium 7% 4 2 10 6 % Actual Value 3% 6 0arrow_forwardGive typing answer with explanation and conclusion The return on the Tarheel Corporation stock is expected to be 14 percent with a standard deviation of 9 percent. The beta of Tarheel is 0.9. The risk-free rate is 6 percent, and the expected return on the market portfolio is 16 percent. What is the probability that an investor in Tarheel will earn a rate of return less than the required rate of return? Assume that returns are normally distributed. Use Table V to answer the question. Round z value in intermediate calculation to two decimal places. Round your answer to the nearest whole number.arrow_forward2) see picturearrow_forward
- 2. Suppose that the market model for stocks A and B is estimated with the following results: RA = 1% +0.9*RM+EA RB = -2% + 1.1*RM+EB The standard deviation of the markets returns is 20% and firm specific risk (standard deviation) equals 30% for A and 10% for B. a. Compute the risk (standard deviation) of each stock and the covariance between them. Suppose we form an equally weighted portfolio of stocks A and B. What will be the nonsystematic standard deviation of that portfolio? b.arrow_forwardb) You are given the following information about Stock X and the market: The annual effective risk-frec rate is 5%. The expected return and volatility for Stock X and the market are shown in the table below: Expected Return Volatility Stock X 5% 40% Market 8% 25% The correlation between the returns of stock X and the market is -0.25. Assume the Capital Asset Pricing Model holds. Calculate the required return for Stock X and determine if the investor should invest in Stock X.arrow_forwardPlease see attached.arrow_forward
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