The betas for the stocks Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

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Answer 1

Question

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

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Answer 2

Question

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

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Answer 3

Question

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

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Answer 4

Question

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

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Answer 5

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

Answer 6

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

Answer 7

Chapter 9, Problem 9PS

a.

Summary Introduction

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer 8

a.

Expert Solution

Answer to Problem 9PS

The beta value for aggressive and defensive stock is 2.00 and 0.30 respectively

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

Beta measures an investment’s volatility as it correlates to market volatility. When beta value more than 1, it means the investment has more systematic risk than the market. If beta less than 1, it means less systematic risk. When beta equals to 0, the investment has same systematic risk as the market.

AggressiveStock=−2%−38%5%−25%=2.00

DefensiveStock=6%−12%5%−25%=0.30

So, the beta value is 2.00 and 0.30 for aggressive and defensive stock respectively.

Answer 13

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

Answer 14

b.

Summary Introduction

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer 15

b.

Expert Solution

Answer to Problem 9PS

The expected rate of return for aggressive stock and for the defensive stock is 18% and 9% respectively.

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

Calculation of expected rate of return (Aggressive Stock),

E(r)=0.5×[E(r1)+E(r2)]

By substituting the value of 2% and 38%,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[−2%+38%]=0.5×[36%]=18%

The expected rate of return (aggressive stock) is 18%

Calculation of expected rate of return (Defensive Stock),

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[6%+12%]=0.5×[18%]=9%

The expected rate of return (Defensive stock) is 9%

Answer 20

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

Answer 21

c.

Summary Introduction

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer 22

c.

Expert Solution

Answer to Problem 9PS

The SML for the economy is shown in the graph

Answer 23

c.

Expert Solution

Answer 24

c.

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market portfolio

The expected rate of return of each stock,

E(r)=0.5×[E(r1)+E(r2)]

=0.5×[5%+25%]=0.5×[30%]=15%

Now substituting the value of Expected rate of return on market,

E(r)=rf+β[E(rM)−rf]

=6%+β×[E(rM)−rf]=6%+β×[15%−6%]=6%+9%×β

So, SML is, E(r)=6%+9%×β

The SML with the market return in the graph is,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 1

Answer 27

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

Answer 28

d.

Summary Introduction

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer 29

d.

Expert Solution

Answer to Problem 9PS

The alpha of defensive stock is 8.7% and for the aggressive stock is (-6%)

Answer 30

d.

Expert Solution

Answer 31

d.

Expert Solution

Answer 32

Expert Solution

Answer 33

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.

The stocks on SML graph,

INVESTMENTS-CONNECT PLUS ACCESS, Chapter 9, Problem 9PS , additional homework tip 2

Calculation of alpha value for defensive stock,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×0.3=6%+2.7%=8.7%

Calculation of alpha value for aggressive stock,

E(r)=rf+β[E(rM)−rf]

=6%+2×[15%−6%]=6%+9%×2=6%+18%=24%

a=ActualExpectedReturn−RequiredReturnAsPerCAPM=18%−24%=(−6%)

So, the value of alpha is (-6%) for aggressive stock

Answer 34

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

Answer 35

e.

Summary Introduction

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer 36

e.

Expert Solution

Answer to Problem 9PS

8.7% is the hurdle rate for the project

Answer 37

e.

Expert Solution

Answer 38

e.

Expert Solution

Answer 39

Expert Solution

Answer 40

Explanation of Solution

Given Information: Market return, aggressive stock and the defensive stock is given

The capital asset pricing model describes the expected return on beta based security. This model is used for determine the expected return on asset, which is based on systematic risk.The hurdle rate can be calculated by the beta value of the project. The hurdle rate is the expected rate of return for the defensive stock.

Calculate the discount rate for the project,

E(r)=rf+β[E(rM)−rf]

By substituting the value of expected rate of market and beta value,

E(r)=rf+β[E(rM)−rf]

=6%+0.3×[15%−6%]=6%+9%×(0.3)=6%+2.7%=8.7%

So, the hurdle rate is 8.7%

Answer 41

Ch. 9 - Prob. 1PS Ch. 9 - Prob. 2PS Ch. 9 - Prob. 3PS Ch. 9 - Prob. 4PS Ch. 9 - Prob. 5PS Ch. 9 - Prob. 6PS Ch. 9 - Prob. 7PS Ch. 9 - Prob. 8PS Ch. 9 - Prob. 9PS Ch. 9 - Prob. 10PS

The betas for the stocks Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

To determine: The betas for the stocks Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer to Problem 9PS

Explanation of Solution

To determine: The expected rate of return on stock Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer to Problem 9PS

Explanation of Solution

To determine: The SML for the economy Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer to Problem 9PS

Explanation of Solution

To determine: The alphas of each stock Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer to Problem 9PS

Explanation of Solution

To determine: The hurdle rate used by the management for a project Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

Answer to Problem 9PS

Explanation of Solution

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Chapter 9 Solutions

To determine: The betas for the stocks

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

To determine: The expected rate of return on stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

To determine: The SML for the economy

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

To determine: The alphas of each stock

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.

To determine: The hurdle rate used by the management for a project

Introduction: Systematic risk is also known as volatility or non- diversifiable risk. It is the risk that is assumed by everyone before investing in a market. This kind of risk is unpredictable.