INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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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
INVESTMENTS(LL)W/CONNECT
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- 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
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