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Concept explainers
Expected EPS:
Estimated income to be earned from a company to its equity shareholders. EPS stands for earnings per share.
Calculate the expected EPS as follows:
Standard deviation is used to measure the risk of the investment.
Calculate the standard deviation as follows:
Coefficient of variation:
It is ratio of standard deviation to expected return.
Calculate the coefficient of variation as follows:
EPS for two firms is given. Calculate the expected value, standard deviation and coefficient of variation for the both the firms
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Chapter 12 Solutions
CFIN (with MindTap Finance, 1 term (6 months) Printed Access Card) (MindTap Course List)
- Assume the standard deviation of the market return is 0.2, the standard deviation of asset k is 0.45 and the beta of asset k is 0.675. The correlation coefficient between the return from asset k and the return from the market is: A. 0.473 OB. 0.900 OC. No answer OD. 0.290arrow_forwardHere are the estimated ROE distributions for Firms A, B, and C: Probability 0.1 0.2 0.4 0.2 0.1 Firm A: ROEA 0.0% 5.0% 10.0% 15.0% 20.0% Firm B: ROEB (2.0) 5.0 12.0 19.0 26.0 Firm C: ROEC (5.0) 5.0 15.0 25.0 35.0 Calculate the expected value and standard deviation for Firm C’s ROE. ROEA =10.0%, σA =5.5%; ROEB =12.0%, σB =7.7%. Discuss the relative riskiness of the three firms’ returns. (Assume that these distributions are expected to remain constant over time.) Now suppose all three firms have the same standard deviation of basic earning power (EBIT/Total Assets), σA = σB = σC =5.5%. What can we tell about the financial risk of each firm?arrow_forwardFor investment A, the probability of the return being 20.0% is 0.5, 10.0% is 0.4, and -10.0% is 0.1 Compute the standard deviation for the investment with the given information. (Round your answer to one decimal place.) a. 85.00% b. 15.00% c. 34.00% d. 17.00% e. 9.00%arrow_forward
- a. Compute the expected rate of return on investment i given the following information: the market risk premium is 5%; Rf = 6%; βi = 1.2. b. Compute E(RM).arrow_forwardSuppose two asset returns are described by a 1-factor model = 2% + 0.6f + ej r2= 2% + 0.6f+ e2 where the volatility of fis 30% and the volatility of e and ez is 20%. What is the covariance of r and r2? (Nearest 0.0001)arrow_forwardOn the basis of the utility formula below, which investment would you select if you were risk averse with A = 4? Investment Expected return E(r) Standard deviation σ 1 0.12 0.30 2 0.15 0.50 3 0.21 0.16 4 0.24 0.21arrow_forward
- Supposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?arrow_forwardThe returns on AA Berhad and BB Berhad are given below, State of Economy Probability of Return (%) AA Return (%) BB occurring Berhad Berhad 1 0.30 6 -15 0.50 10 18 3 0.20 17 40 Calculate: a) Expected return E(R) for i) АА Beфad ii) ВВ Behad b) Standard deviation for i) AA Berhad ii) ВВ ВBehad c) Discuss any FOUR (4) benefits of diversification by referring to AA and BB Berhad.arrow_forwardCalculate the expected return for an investment with the following probability distribution. Return (%) Probability (%) -10 20 5 20 10 20 17 30 26 10arrow_forward
- calculate the following Sharpe Ratio (SP) Treynor Measure Jensen Measure M2 measure T2 measure Information Ratio (appraisal ratio) Fund Average return Standard Deviation Beta coefficient Unsystematic Risk A 0.240 0.220 0.800 0.017 B 0.200 0.170 0.900 0.450 C 0.290 0.380 1.200 0.074 D 0.260 0.290 1.100 0.026 E 0.180 0.400 0.900 0.121 F 0.320 0.460 1.100 0.153 G 0.250 0.190 0.700 0.120 Market 0.220 0.180 1.000 0.000 Risk free return 0.050 0.000arrow_forwardGiven the following probability distribution of returns: Probability Return 0.1 -15.0% 0.25 0.0% 0.3 8.5% 0.25 12.0% 0.1 32.0% what is the expected return?arrow_forwardAlternatives A C D E alternatives have the following returns and standard deviations of returns. Alternatives A B C D E Returns: Expected Value $ 1,460 1,370 10,300 1,180 67,600 Coefficient of Variation Standard Deviation Calculate the coefficient of variation and rank the five alternatives from the lowest risk to the highest risk by using the coefficient of variation. (Round your answers to 3 decimal places.) Rank $ 780 1,490 9,100 1,060 21,500 1469 47 meldarrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
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