Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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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.)
Q3)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.
Which stock is riskiest to a diversified investor?
Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks?
Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?
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.
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.
Chapter 12 Solutions
Fundamentals Of Corporate Finance, 9th Edition
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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- 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. a. Find the beta of each stock. (Round your answers to 2 decimal places.) Stock A Stock D b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.) Market Portfolio % Stock A % Stock D % c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Stock A Stock D d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?arrow_forwardThe figures below show plots of monthly rates of return on three stocks versus those of the market index. The beta and standard deviation of each stock is given beside the plot. Which stock is safest for a diversified investor? Which stock is safest for an undiversified investor who puts all her money in one of these stocks? Consider a portfolio with equal investments in each stock. What would be this portfolio’s beta? Consider a well-diversified portfolio composed of stocks with the same beta and standard deviation 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%. Use the capital asset pricing model to estimate the expected return on each stock. The risk-free rate is 4%, and the market risk premium is 8%.arrow_forwardSyntex, 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 Common Stock B Probability Return Probability Return 0.25 13% 0.25 −7% 0.50 14% 0.25 7% 0.25 18% 0.25 16% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here %. (Round to two decimal places.) Part 2 The standard deviation of stock A is enter your response here %. (Round to two decimal places.) Part 3 b. The expected rate of return for stock B is enter your response here %. (Round to two decimal places.) Part 4 The standard deviation for stock B is enter…arrow_forward
- 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 Common Stock B Probability Return Probability Return 0.35 13% 0.25 −7% 0.30 17% 0.25 8% 0.35 21% 0.25 15% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here%. (Round to two decimal places.)arrow_forwardConsider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period. a. A market-value-weighted index. rate of returnb. An equally weighted index. rate of returnarrow_forwardFrom the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be recommend if investment in individual stock is to be made? Justify answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65 0.65arrow_forward
- K (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 Common Stock B Return 13% 17% 18% Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a spreadsheet.) Return -7% 5% 16% 21% www a. Given the information in the table, the expected rate of return for stock A is 16.40 %. (Round to two decimal places.) The standard deviation of stock A is 1.74 %. (Round to two decimal places.) b. The expected rate of return for stock B is 9.8 %. (Round to two decimal places.) The standard deviation for stock B is 6.12 %. (Round to two decimal places.)arrow_forwardFrom the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be best recommend if investment in individual stock is to be made? Justify the answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65arrow_forwardStocks A, B, and C have the same expected return and standard deviation. The following table shows the correlation between the returns on these stocks. Stock A Stock B Stock C Stock A +1.0 Stock B +0.9 +1.0 Stock C +0.1 -0.4 +1.0 Given these correlations, the portfolio constructed from these stocks having the lowest risk is a portfolio: Equally invested in stocks A and B. Equally invested in stocks A and C. Equally invested in stocks B and C. Totally invested in stock C.arrow_forward
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