Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 13, Problem 18QP
Reward-to-Risk Ratios [LO4] Stock Y has a beta of 1.2 and an expected return of 11.4 percent. Stock Z has a beta of .80 and an expected return of 8.06 percent. If the risk-free rate is 2.5 percent and the market risk premium is 7.2 percent, are these stocks correctly priced?
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Chapter 13 Solutions
Fundamentals of Corporate Finance
Ch. 13.1 - How do we calculate the expected return on a...Ch. 13.1 - In words, how do we calculate the variance of the...Ch. 13.2 - What is a portfolio weight?Ch. 13.2 - How do we calculate the expected return on a...Ch. 13.2 - Is there a simple relationship between the...Ch. 13.3 - What are the two basic parts of a return?Ch. 13.3 - Under what conditions will a companys announcement...Ch. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQCh. 13.5 - What happens to the standard deviation of return...
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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- 5) Two firms have 0.75 difference in their beta and 5% difference in their expected return, what is the implied price of beta, risk free rate and market return?arrow_forwardThe rate of return on U.S. T-bills is 3.25% and the expected return on the market is 9.50%. J&X, Inc. has a beta (b) of 1.48 Which of the following is most correct? J&X has less total risk than the average firm. J&X has more systematic, or market risk than the average firm. J&X has less non-diversifiable risk than the average firm. J&X has more total risk than the average firm.arrow_forward7. Portfolio Risk and Return. Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and T-bills provide a risk-free return of 4%. (LO12-1) How would you construct a portfolio from these two assets with an expected return of 8%? Specifically, what will be the weights in the S&P 500 versus T-bills? How would you construct a portfolio from these two assets with a beta of .4? Find the risk premiums of the portfolios in parts (a) and (b), and show that they are proportional to their betas.arrow_forward
- 1) Consider the following expectations for the market and two stocks in two possible equally likely states: State Market return Stock A Stock B Boom 25% 38% 12% Recession 5% -2% 6% a. What is the expected return on each stock? b. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a β of 2 and Stock B has a β of 0.3. c. Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?arrow_forwardQUESTION 6 Calculate the expected return for C Inc., which has a beta of 0.8 when the risk-free rate is 0.04 and you expect the market return to be 0.12. a. 8.10 percent b. 9.60 percent c. 10.40 percent d. 11.20 percent e. 12.60 percentarrow_forwardD4) Consider two stocks A and B. Both have an expected return of 10%, and their standard deviations are 18% and 16% respectively. Also, their correlation is 0.35. If the risk-free rate of return is 3%, identify the tangency portfolio, and calculate its expected return and standard deviation.arrow_forward
- 1. We would generally find that the beta of a single security is more stable over time than the beta of the market portfolio. True False 2. Cooley Company's stock has a beta of 1.40, the risk-free rate is 25%, and the market risk premium is 5.50%. What is the firm's required rate of return? A. 12.95 B. 6.00 C. 7.70 D. 11.95 E. 10.95 3. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the unique risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all systemic risk. True Falsearrow_forwardCAPM: The Treasury bill rate is 5%, and the expected return on the market portfolio is 12%. On the basis of Capital Asset Pricing Model: What is the risk premium of the market? What is the risk premium of an investment with a beta of 1.5? What is the required return of an investment with a beta of 1.5? If an investment has a beta of .8 and offers an expected return of 11% (think of it as its IRR), does it have a positive NPV?arrow_forward4. Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,and all stocks have independent firm-specific components with a standard deviation of 45%.Portfolios A and B are both well-diversified with the following properties: What is the expected return–beta relationship in this economy?arrow_forward
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