Loose Leaf for Essentials of Corporate Finance
9th Edition
ISBN: 9781259718984
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 11, Problem 20QP
Summary Introduction
To determine: The risk-free rate.
Introduction:
The reward-to-risk ratio indicates the
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Consider the following hypothetical firms with their respective beta
ABC- 1
MNO- 0
QRS- 1.2
XYZ- 0.85
i. Which firm has the highest risk?
ii. Which firm is risk free?
iii. Which firm’s returns will be equal to the market returns?
Based on this image, how many stocks does it take to eliminate most of the diversifiable risk?
Reward-to-Risk Ratios [LO4] Stock Y has a beta of 1.3 and an expected return of
18.5 percent. Stock Z has a beta of 0.7 and an expected return of 12.1 percent. If the
risk-free rate is 8 percent and the market risk premium is 7.5 percent, are these
stocks correctly priced?
Reward-to-Risk Ratios [LO4] In the previous problem, what would the risk-free
rate have to be for the two stocks to be correctly priced?
Chapter 11 Solutions
Loose Leaf for Essentials of Corporate Finance
Ch. 11.1 - How do we calculate the expected return on a...Ch. 11.1 - Prob. 11.1BCQCh. 11.2 - What is a portfolio weight?Ch. 11.2 - How do we calculate the expected return on a...Ch. 11.2 - Is there a simple relationship between the...Ch. 11.3 - Prob. 11.3ACQCh. 11.3 - Prob. 11.3BCQCh. 11.4 - Prob. 11.4ACQCh. 11.4 - Prob. 11.4BCQCh. 11.5 - Prob. 11.5ACQ
Ch. 11.5 - Prob. 11.5BCQCh. 11.5 - Prob. 11.5CCQCh. 11.5 - Prob. 11.5DCQCh. 11.6 - Prob. 11.6ACQCh. 11.6 - Prob. 11.6BCQCh. 11.6 - How do you calculate a portfolio beta?Ch. 11.6 - True or false: The expected return on a risky...Ch. 11.7 - Prob. 11.7ACQCh. 11.7 - Prob. 11.7BCQCh. 11.7 - Prob. 11.7CCQCh. 11.8 - If an investment has a positive NPV, would it plot...Ch. 11.8 - Prob. 11.8BCQCh. 11 - What does variance measure?Ch. 11 - Prob. 11.2CCh. 11 - What is the equation for total return?Ch. 11 - Prob. 11.4CCh. 11 - Prob. 11.5CCh. 11 - By definition, what is the beta of the average...Ch. 11 - Section 11.7What does the security market line...Ch. 11 - Diversifiable and Nondiversifiable Risks. In broad...Ch. 11 - Information and Market Returns. Suppose the...Ch. 11 - Systematic versus Unsystematic Risk. Classify the...Ch. 11 - Systematic versus Unsystematic Risk. Indicate...Ch. 11 - Prob. 5CTCRCh. 11 - Prob. 6CTCRCh. 11 - Prob. 7CTCRCh. 11 - Beta and CAPM. Is it possible that a risky asset...Ch. 11 - Prob. 9CTCRCh. 11 - Earnings and Stock Returns. As indicated by a...Ch. 11 - Determining Portfolio Weights. What are the...Ch. 11 - Portfolio Expected Return. You own a portfolio...Ch. 11 - Prob. 3QPCh. 11 - Prob. 4QPCh. 11 - Prob. 5QPCh. 11 - Prob. 6QPCh. 11 - Calculating Returns and Standard Deviations. Based...Ch. 11 - Prob. 8QPCh. 11 - Prob. 9QPCh. 11 - LO1, LO2 10.Returns and Standard Deviations....Ch. 11 - Calculating Portfolio Betas. You own a stock...Ch. 11 - Calculating Portfolio Betas. You own a portfolio...Ch. 11 - Using CAPM. A stock has a beta of 1.23, the...Ch. 11 - Using CAPM. A stock has an expected return of 11.4...Ch. 11 - Using CAPM. A stock has an expected return of 10.9...Ch. 11 - Prob. 16QPCh. 11 - Using CAPM. A stock has a beta of 1.23 and an...Ch. 11 - Using the SML. Asset W has an expected return of...Ch. 11 - Reward-to-Risk Ratios. Stock Y has a beta of 1.20...Ch. 11 - Prob. 20QPCh. 11 - Prob. 21QPCh. 11 - Prob. 22QPCh. 11 - Prob. 23QPCh. 11 - Calculating Portfolio Weights and Expected Return....Ch. 11 - Portfolio Returns and Deviations. Consider the...Ch. 11 - Prob. 26QPCh. 11 - Analyzing a Portfolio. You want to create a...Ch. 11 - Prob. 28QPCh. 11 - SML. Suppose you observe the following situation:...Ch. 11 - Systematic versus Unsystematic Risk. Consider the...Ch. 11 - Beta is often estimated by linear regression. A...
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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
- 2. Would a relatively high P/E ratio lead us to conclude that a stock is overvalued or undervalued? Why or why not?arrow_forwardA) What does the single index model estimate? B) What is the market risk premium? C) What does Beta show? D) What are all the possible values of Beta and what do they mean?arrow_forward30. Gamma: Look at the following chart. Based only on this information, which underlying equity is the riskiest? UNDERLYI NG: A B C D DELT GAMM A: .51 .54 .50 .54 A: .09 .10 .12 .08arrow_forward
- 3. Why coefficient of variation is a better measure of risk than standard deviation? 4. What is agency problem and what are the solutions to this problem? 5. What are the different methods to measure the cost of equity for a firm? 6. What is Security Market line with reference to CAPM 7. Write the formula to measure Risk of portfolio comprising of 3 stocks 8. What is Beta in CAPM and what does it measure.arrow_forwardwhich one is correct? QUESTION 6 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. efficient frontier. b. utility curve. c. last frontier. d. efficient portfolio. e. capital asset pricing model.arrow_forwardSuppose you have the follow information about Intrinsic Co. and the market. What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d) 1.26 Intrinsic Co. Returns 15.4% 17.9% 21.5% Market Returns 9.1% 10.8% 13.5%arrow_forward
- 10. An announcement that the prices of goods and services in the market are risking would cause an increase in which of the following? O a. The default risk premium O o The risk free rate ) r The liquidity risk premium O o The inflation risk premiumarrow_forwardConsider an economy with just two assets. The details of these are given below. Number of Shares Price Expected Return Standard Deviation A 100 1.5 15 15 B 150 2 12 9 The correlation coefficient between the returns on the two assets is 1=3 and there is also a risk-free asset. Assume the CAPM model is satisfied. (1) What is the expected rate of return on the market portfolio? (2) What is the standard deviation of the market portfolio? (3) What is the beta of stock A? (4) What is the risk-free rate of return?arrow_forward7. Calculating Returns and Standard Deviations [LO1] Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B: Rate of Return If State Occursarrow_forward
- 14. Risk free asset, the market, and stock X have the expected returns of 2%, 8%, and 12% respectively. If X and the market has a covariance of 0.1503, what is the risk level of the market (as it is measured by the standard deviation)?arrow_forward3. The beta for the risk-free investment is closest to: A) 1. B) 0. C) Unable to answer this question without knowing the risk-free rate. D) Unable to answer this question without knowing the market's volatility.arrow_forward4.32 Investment risk analysis. The risk of a portfolio of financial assets is sometimes called investment risk. In general, in- vestment risk is typically measured by computing the vari- ance or standard deviation of the probability distribution that describes the decision maker's potential outcomes (gains or losses). The greater the variation in potential outcomes, the greater the uncertainty faced by the decision maker; the smaller the variation in potential outcomes, the more predictable the decision maker's gains or losses. The two discrete probability distributions given in the next table were developed from historical data. They describe the potential total physical damage losses next year to the fleets of delivery trucks of two different firms. Loss Next Year SO 500 NW 1,000 1,500 2,000 2.500 Firm A 3.000 3,500 4,000 4,500 5,000 Firm B Probability Loss Next Year 01 SO 0 .01 200 .01 700 1,200 1,700 2,200 2,700 3.200 3.700 4,200 4,700 30 .01 01 Probability 85984579985 .30 a.…arrow_forward
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