EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Chapter 11, Problem 6CQ
Beta and
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Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf]
Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate?
A) zero
B) 0.5
C) 1.0
D) its random
You are a risk-averse investor. Would you therefore invest in financial assets that have a high or a low beta (b) coefficient? How high or low the beta coefficient should be in this case?
When can investors treat beta as a relevant risk measure and when can they treat beta as only a systematic risk measure? Explain the two cases clearly and carefully (Explain using a graph and make sure you label the axes)
Chapter 11 Solutions
EBK CORPORATE FINANCE
Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQCh. 11 - Prob. 9CQCh. 11 - Prob. 10CQ
Ch. 11 - Determining Portfolio Weights What are the...Ch. 11 - Portfolio Expected Return You own a portfolio that...Ch. 11 - Portfolio Expected Return You own a portfolio that...Ch. 11 - Portfolio Expected Return You have 10,000 to...Ch. 11 - Prob. 5QPCh. 11 - Calculating Returns and Standard Deviations Based...Ch. 11 - Calculating Expected Returns A portfolio is...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Returns and Standard Deviations Consider the...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 1.15, the...Ch. 11 - Using CAPM A stock has an expected return of 13.4...Ch. 11 - Using CAPM A stock has an expected return of 13.4...Ch. 11 - Using CAPM A stock has an expected return of 11.2...Ch. 11 - Prob. 16QPCh. 11 - Prob. 17QPCh. 11 - Reward-to-Risk Ratios Stock Y has a beta of 1.20...Ch. 11 - Prob. 19QPCh. 11 - Portfolio Returns Using information from the...Ch. 11 - Prob. 21QPCh. 11 - Portfolio Returns and Deviations Consider the...Ch. 11 - Analyzing a Portfolio You want to create a...Ch. 11 - Prob. 24QPCh. 11 - Prob. 25QPCh. 11 - Prob. 26QPCh. 11 - Prob. 27QPCh. 11 - Prob. 28QPCh. 11 - Correlation and Beta You have been provided the...Ch. 11 - CML The market portfolio has an expected return of...Ch. 11 - Beta and CAPM A portfolio that combines the...Ch. 11 - Beta and CAPM Suppose the risk-free rate is 4.7...Ch. 11 - Systematic versus Unsystematic Risk Consider the...Ch. 11 - SML Suppose you observe the following situation:...Ch. 11 - Prob. 35QPCh. 11 - Prob. 36QPCh. 11 - Prob. 37QPCh. 11 - Minimum Variance Portfolio Assume Stocks A and 8...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MC
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- Explain what is meant by beta. What risk does beta measure? What is the market return? How is the interpretation of beta related to the market return?arrow_forwardIn the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected excess return. (Assuming investors are risk-averse.) True or False?arrow_forwardHow is it possible to achieve a higher rate of return without significantlyincreasing risk?arrow_forward
- Is there any justification for an investor to invest in assets with a negative beta?arrow_forwardExplain if the operational risk is considered a risk or uncertainty? Why? If it is a risk, how can we quantify it? Please provide an example. In Investment, why do you need to quantify every risk?arrow_forwardAnother name for the expected value of an investment would be: Answer a. The mean value b. The upper-end value c. The certain value d. The risk-free valuearrow_forward
- What is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of return.c. Negative rate of return.d. Risk-free rate of return.arrow_forwardHow do an investment's required rate of return vary with perceived risk? Explain with an example?arrow_forwardDo you believe on the principle-higher risk provides higher return? Can we achieve high return with no risk at all? Explain your answer.arrow_forward
- Why is the additional risk not taken without expected additional return?arrow_forwardWhat is the expected return on a portfolio? How can the expected return on a portfolio be manipulated to minimize the risk on that portfolio? Justify your answer.arrow_forwardWhat does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumedarrow_forward
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