MyLab Finance with Pearson eText -- Access Card -- for Corporate Finance (Myfinancelab)
4th Edition
ISBN: 9780134099170
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Question
Chapter 10, Problem 2P
a)
Summary Introduction
To determine: The expected return.
Introduction:
Expected return refers to a return that the investors expect on a risky investment in the future.
b)
Summary Introduction
To determine: The standard deviation of the return.
Introduction:
Standard deviation refers to the variation in the actual returns from the expected returns.
Variance refers to the average difference of squared deviations of the actual data from the mean or average.
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The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.
Month
Madison Cookies
Sophie Electric
1
-0.04
0.07
2
0.06
-0.02
3
-0.07
-0.10
4
0.12
0.15
5
-0.02
-0.06
6
0.05
0.02
Compute the following:
a. Average monthly rate of return, Ri, for each stock
b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return
What level of correlation would you have expected before performing your calculations? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?
a. Given the following holding-period returns,
LOADING...
,
compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is
1.87
and the risk-free rate is
6
percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk?
Month
Zemin Corp.
Market
1
5
%
6
%
2
2
1
3
2
0
4
−4
−1
5
4
3
6
3
4
The following table shows the one-year return distribution of Startup, Inc.
Calculate:
1. The expected return.
2. The standard deviation of the return.
Probability 40% 20% 20% 10% 10%
Return - 100% - 75% - 50% - 25% 1000%
Chapter 10 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Corporate Finance (Myfinancelab)
Ch. 10.1 - For an investment horizon from 1926 to 2012, which...Ch. 10.1 - For an investment horizon of just one year, which...Ch. 10.2 - Prob. 1CCCh. 10.2 - Prob. 2CCCh. 10.3 - How do we estimate the average annual return of an...Ch. 10.3 - Prob. 2CCCh. 10.4 - Prob. 1CCCh. 10.4 - Do expected returns of well-diversified large...Ch. 10.4 - Do expected returns for Individual stocks appear...Ch. 10.5 - What is the difference between common risk and...
Ch. 10.5 - Prob. 2CCCh. 10.6 - Explain why the risk premium of diversifiable risk...Ch. 10.6 - Why is the risk premium of a security determined...Ch. 10.7 - What is the market portfolio?Ch. 10.7 - Define the beta of a security.Ch. 10.8 - Prob. 1CCCh. 10.8 - Prob. 2CCCh. 10 - The figure on page informalfigure shows the...Ch. 10 - Prob. 2PCh. 10 - Prob. 3PCh. 10 - Prob. 4PCh. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - The last four years of returns for a stock are as...Ch. 10 - Prob. 9PCh. 10 - Prob. 10PCh. 10 - Prob. 11PCh. 10 - How does the relationship between the average...Ch. 10 - Consider two local banks. Bank A has 100 loans...Ch. 10 - Prob. 21PCh. 10 - Prob. 22PCh. 10 - Consider an economy with two types of firms, S and...Ch. 10 - Prob. 24PCh. 10 - Explain why the risk premium of a stock does not...Ch. 10 - Prob. 26PCh. 10 - Prob. 27PCh. 10 - What is an efficient portfolio?Ch. 10 - What does the beta of a stock measure?Ch. 10 - Prob. 31PCh. 10 - Prob. 32PCh. 10 - Prob. 33PCh. 10 - Suppose the risk-free interest rate is 4%. a. i....Ch. 10 - Prob. 35PCh. 10 - Prob. 36PCh. 10 - Suppose the market risk premium is 6.5% and the...Ch. 10 - Prob. 38P
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