CORPORATE FINANCE(LL)
11th Edition
ISBN: 9781260430011
Author: Ross
Publisher: MCG
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Textbook Question
Chapter 10, Problem 27QP
Using Probability Distributions Suppose the returns on large-company stocks are
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Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."
What is the standard deviation of the returns on a stock given the following information? Could you please show the work?
State of Economy
Probability of state of Economy
Rate of return if state occurs
Boom
0.3000
0.1500
Normal
0.6500
0.1200
Recession
0.0500
0.0600
Average
0.3333
0.1100
based on the current variables that may impact stock demand, such as inflation, budget deficit, monetary policies, political situations, and investor's sentiment generally. Do you believe that stock prices will grow or drop this year's end based on these conditions? Justify your response using logic. Which of the following factors do you believe will have the greatest influence on stock prices?
Chapter 10 Solutions
CORPORATE FINANCE(LL)
Ch. 10 - Investment Selection Given that RadNet was up by...Ch. 10 - Investment Selection Given that Transocean was...Ch. 10 - Risk and Return We have seen that over long...Ch. 10 - Prob. 4CQCh. 10 - Effects of inflation Look at Table 10.1 and Figure...Ch. 10 - Risk Premiums Is it possible for the risk premium...Ch. 10 - Prob. 7CQCh. 10 - Returns Two years ago, the Lake Minerals and Small...Ch. 10 - Prob. 9CQCh. 10 - Historical Returns The historical asset class...
Ch. 10 - Calculating Returns Suppose a stock had an initial...Ch. 10 - Calculating Yields In Problem 1, what was the...Ch. 10 - Calculating Returns Rework Problems 1 and 2...Ch. 10 - Prob. 4QPCh. 10 - Prob. 5QPCh. 10 - Bond Returns What is the historical real return on...Ch. 10 - Calculating Returns and Variability Using the...Ch. 10 - Risk Premiums Refer to Table 10.1 in the text and...Ch. 10 - Prob. 9QPCh. 10 - Prob. 10QPCh. 10 - Calculating Real Rates Given the information in...Ch. 10 - Holding Period Return A stock has had returns of...Ch. 10 - Prob. 13QPCh. 10 - Prob. 14QPCh. 10 - Calculating Returns You bought a stock three...Ch. 10 - Calculating Real Returns Refer to Table 10.1. What...Ch. 10 - Return Distributions Refer back to Table 10.2....Ch. 10 - Prob. 18QPCh. 10 - Calculating Returns and Variability You find a...Ch. 10 - Arithmetic and Geometric Returns A stock has had...Ch. 10 - Arithmetic and Geometric Returns A stock has had...Ch. 10 - Calculating Returns Refer to Table 10.1 in the...Ch. 10 - Prob. 23QPCh. 10 - Using Return Distributions Suppose the returns on...Ch. 10 - Using Return Distributions Assuming that the...Ch. 10 - Prob. 26QPCh. 10 - Using Probability Distributions Suppose the...Ch. 10 - Prob. 28QPCh. 10 - Prob. 1MCCh. 10 - Prob. 2MCCh. 10 - Assume you decide you should invest at least part...Ch. 10 - Prob. 4MCCh. 10 - A measure of risk-adjusted performance that is...Ch. 10 - What portfolio allocation would you choose? Why?...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- (1) Write out a formula that can be used to value any dividend-paying stock, regardless of its dividend pattern. (2) What is a constant growth stock? How are constant growth stocks valued? (3) What happens if a company has a constant gL that exceeds its rs? Will many stocks have expected growth greater than the required rate of return in the short run (i.e., for the next few years)? In the long run (i.e., forever)?arrow_forwardMarket equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?arrow_forwardThe file Fortune500 contains data for profits and market capitalizations from a recent sample of firms in the Fortune 500 a. Prepare a scatter diagram to show the relationship between the variables Market Capitalization and Profit in which Market Capitalization is on the vertical axis and Profit is on the horizontal axis. Comment on any relationship between the variables. b. Create a trendline for the relationship between Market Capitalization and Profit. What does the trendline indicate about this relationship?arrow_forward
- Use the extended DuPont equation to provide a breakdown of Computrons projected return on equity. How does the projection compare with the previous years and with the industrys DuPont equation?arrow_forwardThe table below shows information about the performance of stocks A and B last year. Return Standard Deviation Stock A 15 % 8.3% Stock B 14% 2.1% As a financial advisor, are there factors other than return and risk that should be considered in making this decision? Based on these factors, what stock would you recommend to the client?arrow_forwardAssume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding common stocks.arrow_forward
- Suppose you have predicted the following returns for stocks C (Your Company) and T (Your Competitor) in three possible states of nature. What are the expected returns? State Probability C T Boom 0.2 0.13 0.30 Normal 0.5 0.12 0.17 Recession 0.3 0.04 0.02arrow_forward. Assume an investor uses the constant-growth DVM to value a stock. Listed are various situations that could affect the computed value of a stock. Look at each one of these individually and indicate whether it would cause the computed value of a stock to go up, go down, or stay the same. Briefly explain your answers. Dividend payout ratio goes up. Stock’s beta rises. Market return increases.arrow_forwardExploring Finance: Betas and Stock Volatility. Betas: Stock Volatility Conceptual Overview: Explore how stock volatility relates to the beta coefficient b risk measure. The tendency of a stock to move with the market is measured by its beta coefficient, b. When first loaded, the graph shows the line for an average stock, which necessarily matches the market return. In a year when the market returns 10%, the average stock returns 10%. And in a year when the market goes down -10%, the average stock goes down -10% also. The slope of the line for the average stock is b = 1.0. A more volatile stock would change more extremely. Drag the line vertically so that it has a slope of b = 2.0. For this more volatile stock, in a year when the market returned 20%, the volatile stock did better with a 30% return, and when the market lost -10%, the volatile stock lost big with a -30% change. Now drag the line so that it has a slope of b = 0.5. This stock is less volatile than the average stock and…arrow_forward
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