INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 9, Problem 7PS
Summary Introduction
To determine: The most accurate statement
Introduction: The
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Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.b. The stock of Kaskin, Inc., has more total risk than the stock of Quinn, Inc.c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the
information that follows, which investment is better, based on the risk (as measured by the standard deviation)
and return?
Common Stock A
Probability
0.35
0.30
0.35
Return
13%
14%
18%
Common Stock B
Return
- 6%
7%
16%
20%
Probability
0.15
0.35
0.35
0.15
(Click on the icon in order to copy its contents into a spreadsheet.)
a. Determine Stock X's beta coefficient.
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given.
Calculate the standard deviations of returns for both Stock X and the NYSE.
c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise,
assume that the market return is equal to the NYSE's average return. Using the information calculated,
what is the assumed risk-free rate in the CAPM equation?
Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)
Chapter 9 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 9 - Prob. 1PSCh. 9 - Prob. 2PSCh. 9 - Prob. 3PSCh. 9 - Prob. 4PSCh. 9 - Prob. 5PSCh. 9 - Prob. 6PSCh. 9 - Prob. 7PSCh. 9 - Prob. 8PSCh. 9 - Prob. 9PSCh. 9 - Prob. 10PS
Ch. 9 - Prob. 11PSCh. 9 - Prob. 12PSCh. 9 - Prob. 13PSCh. 9 - Prob. 14PSCh. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Prob. 21PSCh. 9 - Prob. 22PSCh. 9 - Prob. 23PSCh. 9 - Prob. 24PSCh. 9 - Prob. 1CPCh. 9 - Prob. 2CPCh. 9 - Prob. 3CPCh. 9 - Prob. 4CPCh. 9 - Prob. 5CPCh. 9 - Prob. 6CPCh. 9 - Prob. 7CPCh. 9 - Prob. 8CPCh. 9 - Prob. 9CPCh. 9 - Prob. 10CPCh. 9 - Prob. 11CPCh. 9 - Prob. 12CP
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- Please help with this question with full working out.arrow_forward(Expected Rate of Return and Risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return .30 11% .20 25% .40 15% .30 6% .30 19% .30 14% .20 22%arrow_forwardWhen working with the CAPM, which of the following factors can be determined with the most precision? a. The most appropriate risk-free rate, rRF. b. The market risk premium (RPM). c. The beta coefficient, bi, of a relatively safe stock. d. The expected rate of return on the market, rM. e. The beta coefficient of "the market," which is the same as the beta of an average stock.arrow_forward
- (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) Common Stock B Return 13% 14% 18% Return - 6% 7% 15% 21% a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.)arrow_forward(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return0.20 10% 0.15 -4% 0.60 16% 0.35 7%0.20 21% 0.35 13% 0.15 20% a) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock A? What is the standard deviation? b. Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock B? What is the standard deviation? c. Based on the risk (as measured by the standard deviation) and return of each stock, which…arrow_forwardThe security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: Required return on Stock = Risk-free return + (Market risk premium) (Stock's beta) If a stock's expected return plots on or above the SML, then the stock's return is sufficient ✓to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the…arrow_forward
- When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forward(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.25 0,50 0.25 Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a apreadsheet) Common Stock B Return 10% 17% 18% Return -4% 7% 13% 20% G a. Given the information in the table, the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is (Round to two decimal places.)arrow_forwardStock H has a beta of 1.6, while Stock L has a beta of 0.7. If investors’ aversion to risk increased... a. the risk premiums of Stock H and L would increase by the same amount. b. the risk premium of Stock L would increase by more. c. the risk premiums of Stock H and L would remain unchanged. d. the risk premium of Stock H would increase by more.arrow_forward
- Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.35 13% 0.25 −7% 0.30 17% 0.25 8% 0.35 21% 0.25 15% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here%. (Round to two decimal places.)arrow_forwardStock XYZ has a beta of 0.50 and Stock ABC has beta of 1.00. According to CAPM, Stock XYZ has a A. higher market risk exposure than stock ABC B. lower required return than stock ABC C. lower realized return than stock ABC D. higher total risk exposure than stock ABCarrow_forwardSyntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.25 13% 0.25 −7% 0.50 14% 0.25 7% 0.25 18% 0.25 16% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here %. (Round to two decimal places.) Part 2 The standard deviation of stock A is enter your response here %. (Round to two decimal places.) Part 3 b. The expected rate of return for stock B is enter your response here %. (Round to two decimal places.) Part 4 The standard deviation for stock B is enter…arrow_forward
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