UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 12, Problem 3CQ
Summary Introduction
To determine: To Evaluate the Choice of Risk Factors.
Introduction:
Arbitrage Pricing Theory (APT) is a substitute form of CAPM (
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Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a
very important measure, and managers strive to make the company's ROE numbers look good.
If a firm takes steps that increase its expected future ROE, its stock price will
Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has:
O High ROE and high risk
O High ROE and low risk
increase.
Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on
the company's performance. If you wanted to conduct a comparative analysis for the current year, you would:
O Compare the firm's financial ratios with other firms in the industry for the current year
Compare the firm's financial ratios for the current year with its ratios in previous years
You decide also to conduct a qualitative analysis…
Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good.
If a firm takes steps that increase its expected future ROE, its stock price will increase.
Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has:
High ROE and high risk
High ROE and low risk
Management has constructed the below table of estimates reflecting the possible returns and probabilities for pessimistic, most likely and optimistic results.
Possible outcomes probability return(n$)
Pessimistic 0.4 14.00
Most likely 0.2 34.00
Optimistic 0.4 6.00
a) Determine the expected value of return for the above company
b) What is the risk involved if the company chooses to invest in the above opportunity?
Chapter 12 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 12 - Prob. 1CQCh. 12 - Prob. 2CQCh. 12 - Prob. 3CQCh. 12 - Prob. 4CQCh. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQCh. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ
Ch. 12 - Prob. 1QPCh. 12 - Factor Models Suppose a three-factor model is...Ch. 12 - Prob. 3QPCh. 12 - Multifactor Models Suppose stock returns can be...Ch. 12 - Prob. 5QPCh. 12 - Market Model The following three stocks are...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - APT Assume that the following market model...Ch. 12 - Prob. 10QP
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