EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Textbook Question
Chapter 12, Problem 4QP
Specific versus Market Risk. Figure 12.11 shows plots of monthly
- a. Which stock is safest for a diversified investor?
- b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks?
- c. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?
- d. Consider a well-diversified portfolio made up of stocks with the same beta as Ford. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%.
- e. What is the expected rate of return on each stock? Use the
capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.
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PART A,B and C are completed. need help in D and E. TIA
Unique vs. Market Risk. The figure below shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given besides its plot.
A. Which stock is riskiest to a diversified investor?
B. Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks?
C. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?
D. Consider a well-diversified portfolio made up of stocks with the same beta as Exxon. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20 percent.
E. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8 percent. The risk-free rate of interest is 4 percent.
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as
measured by the standard deviation) and return?
Common Stock A
Probability
0.20
0.60
0.20
Probability
0.15
0.35
0.35
0.15
(Click on the icon in order to copy its contents into a spreadsheet.)
Common Stock B
Return
13%
14%
18%
Return
- 6%
7%
15%
21%
a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.)
The standard deviation of stock A is %. (Round to two decimal places.)
Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock are given beside its plot.
Required:
a. Which stock is safest for a diversified investor?
b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks?
c. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?
d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%.
e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.
Chapter 12 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Ch. 12 - Prob. 1QPCh. 12 - Prob. 2QPCh. 12 - Prob. 3QPCh. 12 - Specific versus Market Risk. Figure 12.11 shows...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - Prob. 9QPCh. 12 - Prob. 10QPCh. 12 - Prob. 11QPCh. 12 - Prob. 12QP
Ch. 12 - Prob. 14QPCh. 12 - Prob. 15QPCh. 12 - Prob. 16QPCh. 12 - Prob. 17QPCh. 12 - Prob. 18QPCh. 12 - Prob. 19QPCh. 12 - Prob. 20QPCh. 12 - Prob. 21QPCh. 12 - Prob. 22QPCh. 12 - Prob. 23QPCh. 12 - Prob. 24QPCh. 12 - Prob. 25QPCh. 12 - Prob. 26QPCh. 12 - Prob. 27QPCh. 12 - Prob. 28QPCh. 12 - Prob. 29QPCh. 12 - Prob. 30QPCh. 12 - Prob. 31QPCh. 12 - Prob. 32QPCh. 12 - Prob. 33QPCh. 12 - Prob. 34QP
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