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Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 11, Problem 12QP
Summary Introduction
To discuss: Whether person X hope the index D in 2016 to be extra or fewer probable to change up or down by additional than 40 points in a day than in 2009.
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Risk Premiums. Here are rates of return on a broad stock market index and on Treasury bills
between 2013 and 2017: (LO11-1)
6.
Year
Stock Market Return (%)
T-Bill Return (%)
2013
31.7%
0.02%
2014
10.9
0.02
2015
-1.6
0.02
2016
13.0
0.20
2017
21.3
0.80
a. What was the risk premium on common stock in each year?
b. What was the average risk premium?
c. What was the standard deviation of the risk premium?
ear, it pays a divi-
Assume these are the stock market and Treasury bill returns for a 5-year period:
Stock Market T-Bill Return
(%)
0.02
0.02
0.02
0. 20
Return (%)
Year
2013
2014
2015
2016
2017
31.7
10.9
-1.6
13.0
21.3
0.80
Required:
a. What was the risk premium on common stock in each year? (Negative values should be entered with a negative sign.)
b. What was the average risk premium?
c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)
What are some comments that can be made on this?
The stock market crash of 2020 is the largest index point plunge in U.S history. Starting March 9 2020, the Dow Jones Industrial Average index suffered one of three point drops. This is sufficient because stock market indexes are a measure of market sentiment. The most common stock indexes are the Dow Jones industrial average, S and P 500, and the Nasdaq stock market composite. The Dow Jones index is price averages while the s and p 500 and the nasdaq stock market composite are market capitalization weighted. When the Dow Jones drops 20.3% in a matter of days, this meant that there were negative market sentiment factors at play. At the time before this occurrence, the threat of the corona virus had investors worried. There would soon be a shutdown which would cause record unemployment and would significantly decrease purchasing power. This caused investors to move their capital into safer investments. In this case it was the bond…
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- 3. Assume that the market is in equilibrium and that stock betas can be estimated with historical data. The returns on the market, the returns on United Fund (UF), the risk-free rate (7.00%), and the required return on the United Fund (15.00%) are shown below. Based on this information, what is the required return on the market, ? Year 2011 2012 2013 2014 2015 Market -9% 11% 15% 5% -1% UF -14% 16% 22% 7% -2%arrow_forwardAssume these are the stock market and Treasury bill returns for a 5-year period: Year 2016 2017 2018 2019 2020 Stock Market Return (%) 33.30 13.20 -3.50 14.50 23.80 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) 3 Required A Required B T-Bill Return Complete this question by entering your answers in the tabs below. Standard deviation (%) 0.12 0.12 0.12 0.07 0.09 x Answer is complete but not entirely correct. Required C What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. 13.69 X % घarrow_forwardSuppose that the probability that the economy will be in a recession one year from now is 0.25. If the economy is in a recession one year from now the price of XYZ common stock will be $150. If the economy is not in a recession one year from now the price of XYZ common stock will be $200. If the current price of XYZ stock is $175, what is the standard deviation of the returns of XYZ common stock over the next year? Enter your answer as a percent without the “%”. Round your final answer to two decimals.arrow_forward
- Assume these are the stock market and Treasury bill returns for a 5-year period: T-Bill Return Year Stock Market Return (8) (8) 2016 32.50 0.07 2017 11.80 0.07 2018 -2.40 0.07 2019 13.70 0.25 2020 22.40 0.27 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Complete this question by entering your answers in the tabs below. Required A Required B Required C What was the risk premium on common stock in each year? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative values should be entered with a negative sign.. Year Risk Premium 2016 % 2017 % 2018 % 2019 % 2020 %arrow_forward11. Market Indexes. The accompanying table shows annual stock prices on the Sulaco Stock Exchange in the republic of Costaguana for 2013–2018. Construct two stock market indexes, one using weights as in the Dow Jones Industrial Average and the other using weights as in the Standard & Poor’s Composite Index. (LO11-2) Please answer this question in simple steps. Find the attached screenshot with valuesarrow_forwardAssume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2016 13.0 0.2 2017 21.0 0.8 2018 -6.2 1.8 2019 29.8 2.1 2020 20.6 0.4 Required: What was the risk premium on common stock in each year? What was the average risk premium? What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)-- expressed in % (NOTE: 11.31% is incorrect)arrow_forward
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