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 8PS
A
Summary Introduction
To Determine: To find out the stock that has higher firm-specific risk of the two.
Introduction: According to the theory of finance, the unsystematic risk associated with the firm is the firm-specific risk, and is fully diversifiable.
B
Summary Introduction
To Determine: To find out the stock that has greater Market risk.
Introduction: Market risk is such risk that cannot be diversified, but can be reduced through hedging.
C
Summary Introduction
To Determine: To find out the stock that has greater fraction of return variability.
Introduction: Investors
D
Summary Introduction
To Determine: To find out what would be the regression interception for Stock A, on the given condition.
Introduction: Investors prefer such stocks that have greater return with lesser variability.
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Students have asked these similar questions
Consider the two (excess return) index model regression results for A and B.
RA
= 1.5% + 1.7RM
R-square = 0.622
Residual standard deviation = 12%
RB
= -2.4 % +1.3RM
R-square=0.468
Residual standard deviation = 9.8%
Required:
a. Which stock has more firm-specific risk?
b. Which stock has greater market risk?
c. For which stock does market movement explain a greater fraction of return variability?
d. If rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have been the
regression intercept for stock A?
Complete this question by entering your answers in the tabs below.
Required A Required B Required C Required D
If rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have been
the regression intercept for stock A?
Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.
Intercept
%
Consider the two (excess return) index model regression results for A and B:
RA = 0.8% + 1RM
R-square = 0.588
Residual standard deviation = 10.8%
RB = –1.2% + 0.7RM
R-square = 0.452
Residual standard deviation = 9%
a. Which stock has more firm-specific risk?
A. Stock A
B. Stock B
Which stock has greater market risk?
A. Stock A
B. Stock B
b. For which stock does market movement has a greater fraction of return variability?
A. Stock A
B. Stock B
c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Consider the two (excess return) index model regression results for A and B:
RA = 0.8% + 1RM
R-square = 0.588
Residual standard deviation = 10.8%
RB = –1.2% + 0.7RM
R-square = 0.452
Residual standard deviation = 9%
a. Which stock has more firm-specific risk?
multiple choice
A. Stock A
B. Stock B
Which stock has greater market risk?
multiple choice 2
A. Stock A
B. Stock B
b. For which stock does market movement has a greater fraction of return variability?
multiple choice 3
A. Stock A
B. Stock B
c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
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- Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 0.03 + 0.7 RM + eA RB = -0.02+ 1.2 RM + eB σM =0.20; R-square A = 0.25 R-square B = 0.20 What is the standard deviation of A & B, respectively? Group of answer choices 0.54, 0.28 0.28, 0.54 0.45, 0.50 0.50, 0.45arrow_forwardpm.2arrow_forwardConsider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.arrow_forward
- Consider the two (excess return) index-model regression results for stocks A and The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns. Stock A Stock B Index model regression estimates 1% + 1.2(rM – rf ) 2% + 0.8(rM – rf ) R-square 0.576 0.436 Residual standard deviation, σ(e) 10.3% 19.1% Standard deviation of excess returns 21.6% 24.9% Calculate the following statistics for each stock: Alpha Information ratio Sharpe ratio Treynor measure Which stock is the best choice under the following circumstances? This is the only risky asset to be held by the investor. This stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market-index fund. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.arrow_forwardConsider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the market's average return was 14%. Performance is measured using an index model regression on excess returns. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns. i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure Stock A a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) % Stock A 1% +1.2(rm rf) % 0.635 11.3% 22.6% Stock B % % Stock B 2% +0.8( rm -rf) b. Which stock is the best choice under the following circumstances? 0.466 20.1% 26.9% i. This is the only risky asset to be held by the investor. ii. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. iii. This is one of many stocks that the investor is analyzing to form an actively managed stock…arrow_forwardThe slope of a regression line when the return on an individual stock's returns are regressed on the return on the market portfolio, would be: OAR BR-₁ B OC none of the answers listed here. ODO imarrow_forward
- Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forwardThe index model for stocks A and B is estimated from excess return with the following results: RA = -0.01 +0.8RM RB = 0.04 + 1.1RM R-squared 4 = 0.15 R-squared B = 0.3 Market-index risk (oM) is 0.2arrow_forward1. Assume a two-factor model explains stock returns. Regression estimates of stocks A and B on the two factors are given below. Stock B, B, A 1.2 -0.5 4 в 3.5 -0.8 2.0 3 Assume further that factor one has expected return of 10 and standard deviation of 8. Factor two has expected return of 5 and standard deviation of 6. a) Calculate expected returns for A and B. b) Calculate standard deviations for A and B. c) Calculate expected return on a portfolio that invests 60% in A and 40% in B.arrow_forward
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