EBK FUNDAMENTALS OF CORPORATE FINANCE A
EBK FUNDAMENTALS OF CORPORATE FINANCE A
10th Edition
ISBN: 8220102801363
Author: Ross
Publisher: YUZU
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

EBK FUNDAMENTALS OF CORPORATE FINANCE A

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 - Prob. 1QPCh. 13 - Prob. 2QPCh. 13 - Prob. 3QPCh. 13 - Prob. 4QPCh. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Prob. 7QPCh. 13 - Prob. 8QPCh. 13 - Prob. 9QPCh. 13 - Prob. 10QPCh. 13 - Prob. 11QPCh. 13 - Prob. 12QPCh. 13 - Prob. 13QPCh. 13 - Prob. 14QPCh. 13 - Prob. 15QPCh. 13 - Prob. 16QPCh. 13 - Prob. 17QPCh. 13 - 18. Using the SML [LO4] Asset W has an expected...Ch. 13 - Prob. 19QPCh. 13 - Prob. 20QPCh. 13 - Prob. 21QPCh. 13 - 22. CAPM [LO4] Using the CAPM, show that the ratio...Ch. 13 - Prob. 23QPCh. 13 - Prob. 24QPCh. 13 - Prob. 25QPCh. 13 - Prob. 26QPCh. 13 - Prob. 27QPCh. 13 - Prob. 28QPCh. 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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