GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
11th Edition
ISBN: 9781260201550
Author: Bodie
Publisher: MCG
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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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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.)
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, 0.45
Consider 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.
Chapter 8 Solutions
GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
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- The 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_forwardConsider the following regression Pt * - Pt = .07(1.4) + .4*Pt (3.6) + et where Pt * is Shiller’s ex post price of a stock, Pt is the actual price and t-ratios are in brackets. Explain in words and analytically what the dependent variable Pt * - Pt should be equal to under the efficient markets theory. Hence interpret the regression. Does it support the efficient markets theory?arrow_forward
- Given the following excess return index model regression results Ra*= -0.059616 + 0.957478Rm* where; \sigma M = 0.80226720, the return on the market portfolio is 0.085306, and the risk-free rate is 0.018302. Note Ra* and Rm* are excess returns. Calculate the actual return for Stock A. Round to 4 decimals, and present answer as a decimal (.08, not 8%) Answer: 0.0228arrow_forwardSuppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What is the covariance between each stock and the market index?arrow_forwardThe index model has been estimated using historical excess return data for stocks A, B, and C, with the following results: RA = 0.02 + 0.9RM + eA RB = 0.04 + 1.2RM + eB RC = 0.10 + 1.ORM + eC OM oM = 0.22 o(eA) = 0.21 o(eB ) = 0.11 o(eC ) = 0.23 a. What are the standard deviations of stocks A, B, and C? b. Break down the variances of stocks A, B, and C into their systematic and firm-specific components. c. What is the covariance between the returns on each pair of stocks? d. What is the covariance between each stock and the market index?arrow_forward
- Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk): Stock % % % % BFT % B F T UE Rit = return for stock i during period t Rmt = return for the aggregate market during period t Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBE: ARF: ARTI: ARC: AREL: с Rit 11.5% 9.2 12.5 12.5 15.9 Rmt 4.7% 6.2 6.6 15.2 11.1arrow_forwardBased on the following information, calculate the expected return and standard deviation for Stock A and Stock B. Input area: State Probability Stock A Stock B Recession 0.15 0.04 (0.17) Normal 0.55 0.09 0.12 Boom 0.30 0.17 0.27 (Use cells A6 to D9 from the given information to complete this question.) Output area: Stock A Probability Return Product Return deviation Squared deviation Product Recession Normal Boom B э O Standard deviation Stock B 2 Recession 3 Normal 4 Boom 5 26 Standard Deviation 27 28 E(R) Variance Probability Return Product Return deviation Squared deviation Product E(R) Variancearrow_forwardPlease solve step by step for clarity, thank you!arrow_forward
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