INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Question
Chapter 11, Problem 10CP
Summary Introduction
(A)
To explain reasons for growth stock investment outperforming value stock investment over a period of time.
Introduction:
Growth and value stock are two approaches in investing funds.
Summary Introduction
(B)
To explain: The reason for value stock not outperforming growth stock in efficient
Introduction:
Value stock has outperformed growth stock over extended period of time.
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Growth and value can be defined in several ways. “Growth” usually conveys the idea of a portfolio emphasizing or including only issues believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. “Value” usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.b. Explain why the outcome suggested in (a) should not be possible in a market widely regarded as being highly efficient.
In measuring the performance of a portfolio, the time-weighted rate of return is superior to the dollar-weighted rate of return because:a. When the rate of return varies, the time-weighted return is higher.b. The dollar-weighted return assumes all portfolio deposits are made on day 1.c. The dollar-weighted return can only be estimated.d. The time-weighted return is unaffected by the timing of portfolio contributions and withdrawals.
according to capm the expected return on equity includes a reward for:
a. market risk and specific risk
b. Specific risk only
c. Time value of money and market risk
d. Diversification and portfolio risk
e. Time value of money and specific risk
Chapter 11 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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- Which statement about portfolio diversification is correct?a. Proper diversification can reduce or eliminate systematic risk.b. Diversification reduces the portfolio’s expected return because it reduces a portfolio’s total risk.c. As more securities are added to a portfolio, total risk typically can be expected to fall at a decreasing rate.d. The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in the portfolio.arrow_forwardUnder the Efficient Capital Market Theory superior analysts are encouraged to focus their efforts on mid-cap stocks rather than top-tier stocks when constructing a portfolio. Explain whyarrow_forwardYou propose managing a portfolio of fixed income securities by utilising a passive strategy. Which of the following actions would your strategy involve? A) Buying inflation linked bonds. B) Buying index linked bonds. C) Matching the fixed income securities to a stated performance benchmark. D) Managing the sector-spread to benefit from a positive sloping yield curve.arrow_forward
- “The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors who are concerned with specific risk. “ is the following statment correct? And explain why.arrow_forward“The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors who are concerned with specific risk. “ Do you agree with the following statement? And explain why.arrow_forwarda) Distinguish between systematic risk and unsystematic risk, and explain the significance of the distinction in portfolio analysis. b) Explain what is meant by a share’s beta value. c) Outline the main practical problems in using the CAPM in capital investment decisions. d) Discuss the assumption in CAPM analysis that corporate debt has a zero beta valuearrow_forward
- Portfolio risk and diversification Portfolio managers pick stocks for their clients’ portfolios based on the investment objective of the portfolio and several other factors. One key consideration is each stock’s contribution to portfolio risk and its statistical relationship with the portfolio’s other stocks. Based on your understanding of portfolio risk, identify whether each statement is true or false. Statement True False A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk. Because of the effects of diversification, the portfolio’s risk is likely to be more than the average of all stocks’ standard deviations. Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio. The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated…arrow_forwardIf market is efficient, in managing an equity portfolio, you will adopt a. Indexing strategy b. Stock rotation strategy c. Security selection strategy d. Market timing strategyarrow_forwardHow is the arbitrage pricing theory (APT) similar to the capital asset pricing model? Group of answer choices Both theories assume that undiversifiable risk is priced. Both theories assume that diversifiable risk is priced Both theories assume investors will hold a well-diversified portfolio Both the first and second responses are true. Both the first and third responses are true.arrow_forward
- Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.arrow_forwardWhich of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.arrow_forwardSelect all that are true with respect to the historical risk-return tradeoff for portfolios, and for individual stocks. Group of answer choices For portfolios, the relation between risk and return is positive and quite strong For individual stocks, the relation between risk and return is positive and stronger than for portfolios The relation between risk and return is stronger for portfolios than it is for individual stocks You get a better risk-return tradeoff if you put assets together in a portfolioarrow_forward
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