Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 11, Problem 28P
Consider the portfolio in Problem 27. Suppose the correlation between Intel and Oracle’s stock increases, but nothing else charges. Would the portfolio be more or less risky with this change?
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Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.
Scenario
Rate of Return
Market
Aggressive Stock A
Defensive Stock D
Bust
−7%
−10%
−5%
Boom
19
25
15
Find the beta of each stock.
If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.
Scenario
Rate of Return
Market
Aggressive Stock A
Defensive Stock D
Bust
−8%
−10%
−6%
Boom
32
38
24
Required:
Find the beta of each stock.
If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −5% −7%−3% Boom 27 35 19 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Please answer fast I give upvote
Chapter 11 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 11.1 - What is a portfolio weight?Ch. 11.1 - How do we calculate the return on a portfolio?Ch. 11.2 - What does the correlation measure?Ch. 11.2 - How does the correlation between the stocks in a...Ch. 11.3 - Prob. 1CCCh. 11.3 - Prob. 2CCCh. 11.4 - Prob. 1CCCh. 11.4 - Prob. 2CCCh. 11.4 - Prob. 3CCCh. 11.5 - What do we know about the Sharpe ratio of the...
Ch. 11.5 - If investors are holding optimal portfolios, how...Ch. 11.6 - When will a new investment improve the Sharpe...Ch. 11.6 - Prob. 2CCCh. 11.7 - Prob. 1CCCh. 11.7 - Prob. 2CCCh. 11.8 - Prob. 1CCCh. 11.8 - According to the CAPM, how can we determine a...Ch. 11 - You are considering how to invest part of your...Ch. 11 - You own three stocks: 600 shares of Apple...Ch. 11 - Consider a world that only consists of the three...Ch. 11 - There are two ways to calculate the expected...Ch. 11 - Using the data in the following table, estimate...Ch. 11 - Use the data in Problem 5, consider a portfolio...Ch. 11 - Using your estimates from Problem 5, calculate the...Ch. 11 - Prob. 8PCh. 11 - Suppose two stocks have a correlation of 1. If the...Ch. 11 - Arbor Systems and Gencore stocks both have a...Ch. 11 - Prob. 11PCh. 11 - Suppose Avon and Nova stocks have volatilities of...Ch. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 16PCh. 11 - What is the volatility (standard deviation) of an...Ch. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Suppose Ford Motor stock has an expected return of...Ch. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - A hedge fund has created a portfolio using just...Ch. 11 - Consider the portfolio in Problem 27. Suppose the...Ch. 11 - Prob. 29PCh. 11 - Prob. 30PCh. 11 - You have 10,000 to invest. You decide to invest...Ch. 11 - Prob. 32PCh. 11 - Prob. 33PCh. 11 - Prob. 34PCh. 11 - Prob. 35PCh. 11 - Prob. 36PCh. 11 - Assume all investors want to hold a portfolio...Ch. 11 - In addition to risk-free securities, you are...Ch. 11 - You have noticed a market investment opportunity...Ch. 11 - Prob. 40PCh. 11 - When the CAPM correctly prices risk, the market...Ch. 11 - Prob. 45PCh. 11 - Your investment portfolio consists of 15,000...Ch. 11 - Suppose you group all the stocks in the world into...Ch. 11 - Prob. 48PCh. 11 - Consider a portfolio consisting of the following...Ch. 11 - Prob. 50PCh. 11 - What is the risk premium of a zero-beta stock?...
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- Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.arrow_forwardYou have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forwardConsider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Scenario Market AggressiveStock A DefensiveStock D Bust –8 % –13 % –6 % Boom 26 35 19 Required:a. Find the beta of each stock.b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?arrow_forward
- Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −10% −5% Boom 19 25 15 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fairarrow_forwardConsider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, and aggressive stock A, and a defensive stock D. A. Find the beta of each stock B. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. C. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? D. Which stock seems to be a better buy on the basis of your answers to (a) through (c).arrow_forwardAssume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.arrow_forward
- Given the information in the table below, which of the following statements is correct, assuming that either security will be held in a portfolio with other investments? Stock Expected Return Required Return Beta Standard Deviation A 10% 12% 0.9 25% B 8% 5% 0.3 35% Question 26 options: The investor should purchase both stocks because their beta is less than that of the market. The investor should purchase A since its risk, as measured by standard deviation, is the lowest. The investor should purchase A because it requires the highest rate of return. The investor should purchase B since its expected return exceeds its required return.arrow_forwardWhich one of the following portfolios will have a beta of zero? a) A portfolio that is equally as risky as the overall market b) A portfolio that consists of a single stock c) A portfolio comprised solely of U. S. Treasury bills d) No portfolio can have a beta of zero.arrow_forwardConsider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Aggressive Defensive Scenario Market Stock A Stock D bust -6% -12% -4% boom 15 36 10 Required:a. Find the beta of each stock.b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?arrow_forward
- Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. c. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. d. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. e. The required return on all stocks would increase by the same amount.arrow_forwardWhich of the following statements is INCORRECT? A stock's beta is calculated as the covariance between the stock's price and the market portfolio return, divided by the variance of the market portfolio return. If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy. The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. A stock’s standard deviation is a measure of the total risk.arrow_forwardAre the following true or false? Explain.a. Stocks with a beta of zero offer an expected rate of return of zero.b. The CAPM implies that investors require a higher return to hold highly volatile securities.c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.arrow_forward
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