FUND. OF CORPORATE FIN. 18MNTH ACCESS
15th Edition
ISBN: 9781259811913
Author: Ross
Publisher: MCG CUSTOM
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Textbook Question
Chapter 12, Problem 19QP
Distributions [LO3] In Problem 18, what is the probability that the return is less than −100 percent (think)? What are the implications for the distribution of returns?
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Q. The market rate of return is 14%, beta is 1.5 and the required rate of return is 18.5%. What is risk-free rate of return?
Required Return
Beta
Risk-Free Rate
Market Return
A
12.5%
0.90
8%
?
B
9.0%
1.3
?
8%
C
10.0%
?
7.5%
10.5%
a. What is the market return?
b. What is the Risk-free rate?
c. What is the beta?
Consider the following information:
Standard Deviation Beta
Security T 30% 1.90
Security K 30% 1.20
Which security has more total risk?
Which security has more systematic risk?
Which security should have the higher expected return?
What does the total risk consist of? What kind of risk is eliminated with portfolio diversification?
Chapter 12 Solutions
FUND. OF CORPORATE FIN. 18MNTH ACCESS
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b) Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)arrow_forwardConsider the following information: Standard Deviation. Beta Security T 30% 1.90 Security K. 30% 1.20 a. Which security has more total risk? b. Which security has more systematic risk? c. Which security should have the higher expected return? d. What does the total risk consist of? What kind of risk is eliminated with portfolio diversification?arrow_forwardD6) What are the determinants of Required Rate of Return. Explain the reasons of not shifting SML curve upward or downward even after changes occur in determinants of nominal Risk free rate?arrow_forward
- If the economy is getting better, what's the most likley result in the Default Risk Premium Spreads? O. The Demand Curve will shift left (down) O. The Demand Curve will shift right (up) O. Increases (Widens) O. Decreaces (narrows)arrow_forward10. 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_forwardD6) Suppose that an investment has 0.5% chance of a loss of $10 million and a 99.5% chance of a loss of $1 million. What is the Value-at-Risk (VaR) for this investment when the confidence level is 99%?arrow_forward
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- D4) Give the following true population SIM (not estimated SIM): Ri-Rf=0.1%+1.2(Rb-Rf)+ϵi When estimating this true SIM, what will be the estimated value of alpha (the intercept), when the variance of ϵi is small? Theriskless rate is 0% and the market risk premium is 0.5%. Your answer should be in percentage points. Select one: a.0 b. near 0.1% but not exactly 0.1% c. 0.5% d. 0.1% e. near 0.5% but not exactly 0.5%arrow_forward5) Two firms have 0.75 difference in their beta and 5% difference in their expected return, what is the implied price of beta, risk free rate and market return?arrow_forwardA4) Critically explain the risk premium of a zero-beta stock. Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the risk-free asset?arrow_forward
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