The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index Excess Returns Stock A Excese Returns Stock B F PHYS Af Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock? Multiple Choice Stock A Stock B There is no difference between A or B The answer cannot be determined from the information given.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index Excess Returns Stock A Excese Returns Stock B F PHYS Af Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock? Multiple Choice Stock A Stock B There is no difference between A or B The answer cannot be determined from the information given.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 11QE: Market equity beta measures the covariability of a firms returns with all shares traded on the...

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PART A,B and C are completed. need help in D and E. TIA Unique vs. Market Risk. The figure below shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given besides its plot. A. Which stock is riskiest to a diversified investor? B. Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks? C. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been? D. Consider a well-diversified portfolio made up of stocks with the same beta as Exxon. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20 percent. E. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8 percent. The risk-free rate of interest is 4 percent.
The following information describes the expected return and risk relationship for the stocks of two of WAH’s competitors. Stock X 12.0% 20% 1.3 Stock Y 9.0 15 0.7 Market Index 10.0 12 1.0 Risk-free rate 5.0 Using only the data shown in the preceding table: Draw and label a graph showing the security market line, and position Stocks X and Y relative to it. Compute the alphas both for Stock X and for Stock Y. Show your work. Assume that the risk-free rate increases to 7 percent, with the other data in the preceding matrix remaining unchanged. Select the stock providing the higher expected risk adjusted return and justify your selection. Show your calculations.
Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12% a. The two stocks could not be in equilibrium with the numbers given in the question. b. A's expected dividend is $0.50. c. B's expected dividend is $0.75. d. A's expected dividend is $0.75 and B's expected dividend is $1.20. e. The two stocks should have the same expected dividend.
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% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?
Stocks A and B have the following probability distributions of expected future returns: profitability A B 0.1 11% 27% 0.2 3 0 0.4 12 20 0.2 24 28 0.1 36 43 Calculate the expected rate of return, , for Stock B ( = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.54%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be…
The following three stocks are available in the market: E(R) β Stock A 11.0 % 1.32 Stock B 14.2 1.12 Stock C 16.7 1.52 Market 14.6 1 Assume the market model is valid. a. The return on the market is 15.4 percent and there are no unsystematic surprises in the returns. What is the return on each stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Assume a portfolio has weights of 30 percent Stock A, 45 percent Stock B, and 25 percent Stock C. The return on the market is 15.4 percent and there are no unsystematic surprises in the returns. What is the return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return Aggressive Stock Defensive Stock 5% -3 4% 24 36 9 a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 5% or 24%? (Do not round intermediate calculations. Round your answers to 1 decimal place.) c. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm’s stock if the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 4%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? _______________ Calculate the required return of a portfolio that has $6,000 invested in Stock X and $5,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = __________% If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 87 100 92 100 92 100 B 47 200 42 200 42 200 C 94 200 104 200 52 400 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Calculate the rate of return of the price-weighted index for the second period (t = 1 to t = 2).
You ask a stockbroker what the firm’s research department expects for the three (3) stocksabove, that is, Stock X, Y and Z. The broker responds with the following information:Stock Current Price Expected Price Expected Dividend X 22 24 0.75 Y 48 51 2.00 Z 37 40 1.25Required:B. Calculate the estimated future rate of return for Stock X, Y, and Z. C. Determine which stock is overvalued, undervalued, properly valued, and state whyD. Illustrate with the use of the Security Market Line (SML) how Stock X , Y and Z wouldappear on it.
he table below shows information for 3 stocks. Security Beta Risk-free rate Expected market return Stock 1 1.9 0.02 0.09 Stock 2 1.2 0.035 0.09 Stock 3 0.2 0.015 0.09 The risk-free rates are different because they were measured in different years. Calculate the expected (or required) return for each stock, using the Capital Asset Pricing Model (CAPM). What is the required return for stock 1? What is the required return for stock 2? What is the required return for stock 3?
The figures below show plots of monthly rates of return on three stocks versus those of the market index. The beta and standard deviation of each stock is given beside the plot. Which stock is safest for a diversified investor? Which stock is safest for an undiversified investor who puts all her money in one of these stocks? Consider a portfolio with equal investments in each stock. What would be this portfolio’s beta? Consider a well-diversified portfolio composed of stocks with the same beta and standard deviation as Ford. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%. Use the capital asset pricing model to estimate the expected return on each stock. The risk-free rate is 4%, and the market risk premium is 8%.