FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260100259
Author: Ross
Publisher: MCG CUSTOM
Question
Chapter 13, Problem 13.1CTF
Summary Introduction

To determine: The standard deviation of the stock.

Introduction:

Expected return refers to the return that the investors expect on a risky investment in the future.

Standard deviation refers to the variation in the actual returns from the expected returns.

Expert Solution & Answer
Check Mark

Answer to Problem 13.1CTF

The standard deviation of the stock is 3.82 percent.

Explanation of Solution

Given information:

A stock’s return is 15 percent when the economy is in a boom and 7 percent when the economy is normal. The probability of having a booming economy is 35 percent, and the probability of having a normal economy is 65 percent.

The formula to calculate the expected return on the stock:

Expected returns[E(R)]=[(Possible returns(R1)×Probability(P1))++(Possible returns(Rn)×Probability(Pn))]

The formula to calculate the standard deviation of the stock:

Standarddeviation}=([(Possible returns(R1)Expected returnsE(R))2×Probability(P1)]++[(Possible returns(Rn)Expected returnsE(R))2×Probability(Pn)])

Compute the expected return:

“R1” is the returns in a booming economy. The probability of having a booming economy is “P1”. Similarly, “R2” is the returns in a normal economy. The probability of having a normal economy is “P2”.

Expected returns[E(R)]=[(Possible returns(R1)×Probability(P1))+(Possible returns(R2)×Probability(P2))]=(0.15×0.35)+(0.07×0.65)=0.0525+0.0455=0.098 or 9.8%

Hence, the expected return on the stock is 9.8 percent.

Compute the standard deviation:

“R1” is the returns in a booming economy. The probability of having a booming economy is “P1”. Similarly, “R2” is the returns in a normal economy. The probability of having a normal economy is “P2”.

Standarddeviation}=([(Possible returns(R1)Expected returnsE(R))2×Probability(P1)]+[(Possible returns(R2)Expected returnsE(R))2×Probability(P2)])=[(0.150.098)2×0.35]+[(0.070.098)2×0.65]=0.0009464+0.0005096

=0.001456=0.0382 or 3.82%

Hence, the standard deviation of the stock is 3.82 percent.

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Chapter 13 Solutions

FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<

Ch. 13.5 - What is the principle of diversification?Ch. 13.5 - Why is some risk diversifiable? Why is some risk...Ch. 13.5 - Why cant systematic risk be diversified away?Ch. 13.6 - Prob. 13.6ACQCh. 13.6 - What does a beta coefficient measure?Ch. 13.6 - True or false: The expected return on a risky...Ch. 13.6 - How do you calculate a portfolio beta?Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - What is the security market line? Why must all...Ch. 13.7 - Prob. 13.7CCQCh. 13.8 - If an investment has a positive NPV, would it plot...Ch. 13.8 - What is meant by the term cost of capital?Ch. 13 - Prob. 13.1CTFCh. 13 - Prob. 13.5CTFCh. 13 - Beta is a measure of what?Ch. 13 - The slope of the security market line is equal to...Ch. 13 - Where would a negative net present value project...Ch. 13 - Prob. 1CRCTCh. 13 - Prob. 2CRCTCh. 13 - Systematic versus Unsystematic Risk [LO3] Classify...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Indicate...Ch. 13 - Prob. 5CRCTCh. 13 - Diversification [LO2] True or false: The most...Ch. 13 - Portfolio Risk [LO2] If a portfolio has a positive...Ch. 13 - Beta and CAPM[LO4] Is it possible that a risky...Ch. 13 - Corporate Downsizing [LO1] In recent years, it has...Ch. 13 - Earnings and Stock Returns [LO1] As indicated by a...Ch. 13 - Determining Portfolio Weights [LO1] What are the...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Prob. 4QPCh. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Calculating Returns and Standard Deviations [LO1]...Ch. 13 - Calculating Expected Returns [LO1] A portfolio is...Ch. 13 - Returns and Variances [LO1] Consider the following...Ch. 13 - Returns and Standard Deviations [LO1] Consider the...Ch. 13 - Calculating Portfolio Betas [LO4] You own a stock...Ch. 13 - Calculating Portfolio Betas [LO4] You own a...Ch. 13 - Using CAPM[LO4] A stock has a beta of 1.15, the...Ch. 13 - Using CAPM[LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using the SML[LO4] Asset W has an expected return...Ch. 13 - Reward-to-Risk Ratios [LO4] Stock Y has a beta of...Ch. 13 - Reward-to-Risk Ratios [LO4] In the previous...Ch. 13 - Using CAPM [LO4] A stock has a beta of 1.14 and an...Ch. 13 - Portfolio Returns [LO2] Using information from the...Ch. 13 - Prob. 22QPCh. 13 - Portfolio Returns and Deviations [LO2] Consider...Ch. 13 - Analyzing a Portfolio [LO2, 4] You want to create...Ch. 13 - Analyzing a Portfolio [LO2, 4] You have 100,000 to...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Consider...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - Prob. 1MCh. 13 - Beta is often estimated by linear regression. A...Ch. 13 - Prob. 3MCh. 13 - Prob. 4MCh. 13 - Prob. 5M
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