u observe the following information regarding Company ABC and Company XYZ: · Company ABC has a higher expected mean return than Company XYZ. · Company ABC has a lower standard deviation than Company XYZ. · Company ABC has a higher beta than Company XYZ. Given this information, which of the following statements is most correct? Company ABC has more company-specific risk than Company XYZ. Company ABC has a lower coefficient of variation than Company XYZ. Company ABC is a better stock to buy than Company XYZ. Both companies has equal risk

u observe the following information regarding Company ABC and Company XYZ: · Company ABC has a higher expected mean return than Company XYZ. · Company ABC has a lower standard deviation than Company XYZ. · Company ABC has a higher beta than Company XYZ. Given this information, which of the following statements is most correct? Company ABC has more company-specific risk than Company XYZ. Company ABC has a lower coefficient of variation than Company XYZ. Company ABC is a better stock to buy than Company XYZ. Both companies has equal risk

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 12MC

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Which of the following statements regarding beta is false: a. Beta is a measure of systematic risk. b. The beta of a share is calculated as the covariance between the share and the market divided by the variance of the market. c. If the returns of two firms are negatively correlated, then one of them must have a negative beta. d. A share with a beta equal to -1 has zero systematic risk. e. A share’s beta is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one share.
Which of the following statements is CORRECT? a. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. b. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. c. If investors become less risk averse, the slope of the Security Market Line will increase. d. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. e. The slope of the SML is determined by the value of beta.
Consider the two (excess return) index model regression results for A and B. RA= 0.9% + 1.1RM , R-square = 0.590, and Residual Standard Deviation = 11% RB= -1.4% + 0.6RM, R-square = 0.456, and Residual Standard Deviation = 9.2% Which stock has more firm-specific risk, market risk, and greater fraction of return variability for market movement? Also, if rf were constant at 4.4% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A (write as percentage, rounded to 2 decimal places)?
Answer whether each of the following statements is correct and explain your argument. \ (a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.
The greater the variability of the possible returns on an investment, _________. a. the lesser the expected return b. the lower the standard deviation of the investment c. the higher the actual return on the investment d. the riskier the investment e. the lower the beta of the investment
Using the single factor model for firm with a Beta of 1 and when the standard deviation of the market is .3. A) What can we say about the standard deviation of this firm’s stock? B) If a new firm Gexco has a Beta of 2 and has a standard deviation of 0.65, what is this Gexco’s firm specific risk? C) Use the known information to find the ratio of explained to total variance, also known as R-squared. Explain what R-square means using words such as systematic and firm specific risk. D) If Gexco’s expected return is 20% and the markets expected return is 12% and the risk free rate is 5%, come up with an estimate of Alpha. Explain and show how a tracking portfolio could be used and what would result. Is the possible gain risk free? 2).Write out the CAPM Model and explain each part.
The beta of Southeast has been estimated to be 0.85. Which of the following statements about Southeast is FALSE? Question 9 options: If the market falls by 1%, Southeast would be expected to fall by 0.85%. The sign of the covariance between Southeast and the market is greater than zero. Southeast is considered to be less risky compared to the market. The covariance between Southeast and the market divided by the variance of the market is equal to 0.85. If the market rises by 1%, Southeast would be expected to rise by 1.85%.
(a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.
Which of the following is NOT true with respect to standard deviation as a measure of risk? Group of answer choices Standard deviation of return measures the sum of diversifiable and undiversifiable risk for a share. 2. Standard deviation contains more information about distribution of returns by comparison with the more crude approach of measuring the range of possible extreme values for return. 3. Standard deviation is measured in standard units, unlike variance which is measured in squared units, 4. Unlike Beta, standard deviation of return measures undiversifiable risk.
Which one of the following statements is TRUE? O a. If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero. O b. The covariance allows us to gauge the strength of the relationship between stocks. O c. While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves. O d. If two assets with return correlation coefficients less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.
Which of the following is NOTa potential problem when estimating and using betas, i.e., which statement is FALSE? a. The fact that a security or project may not have a past history that can be used as the basis for calculating beta. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. c. The beta of an "average stock," or "the market," can change over time, sometimes drastically. d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. e. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future. Please Explain for full credit
Which of the following statements is INCORRECT? A stock's beta is calculated as the covariance between the stock's price and the market portfolio return, divided by the variance of the market portfolio return. If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy. The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. A stock’s standard deviation is a measure of the total risk.