Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 5, Problem 8PS
a. Suppose you
b. What value of A is consistent with a risk premium of 9%?
c. What will happen to the risk premium if investors become more risk tolerant? (LO 5-4)
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Consider the following information: the risk-free rate is 2%, and the expected rate of return on the market portfolio is 10%. If you have a stock with a beta of +1.5, and you expect it to offer a rate of return of 15%, what should you do?
If the Treasury bill rate is currently 1.5%, and the expected return to the market portfolio over the same period is 5%, determine the risk premium on the market. If the standard deviation of the return on the market is 7%, what is the equation of the Capital Market Line?
You are considering an investment in a portfolio P with the following expected returns in three different states of nature:
Recession
Steady
Expansion
Probability
0.20
0.65
0.15
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-20%
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The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5.
What is the portfolio P’s beta?
Does portfolio P have a positive or negative alpha relative to its required return given its level of risk? Would you characterize P as a buy or sell, and why?
1. Suppose the risk-free is 5 %, the average investor has a risk aversion co-efficient of A = 2, and the standard deviation of the market portfolio is 20 %. What is the equilibrium value of the market risk premium? What is the expected return on the market? If the average degree of risk aversion were 3, what would be the market risk premium, and expected return?
2. Historical data for the S & P 500 Index show an average excess return over Treasury bills of about 8.5 % with standard deviation of about 20 %. To the extent that these averages approximate investor expectations for the sample period, what must have been the co-efficient of risk aversion of the average investor? If the co-efficient of risk aversion were 3.5, what risk premium would have been consistent with the market’s historical standard deviation?
3. If only some investors perform security analysis while all others hold the market portfolio (M), would the CML still be the efficient CAL for investors who do not engage…
Chapter 5 Solutions
Essentials Of Investments
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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- Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of −0.25, and a beta coefficient of −0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?arrow_forwardSuppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a beta of 1.7?arrow_forwardYou are considering an investment in a portfolio P with the following expected returns in three different states of nature: Recession Steady Expansion Probability 0.20 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. What is the portfolio P’s beta?arrow_forward
- You are considering an investment in a portfolio P with the following expected returns in three different states of nature: Recession Steady Expansion Probability 0.20 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. Is P an efficient portfolio relative to the market?arrow_forwardThe treasury bill rate is 6%, and the expected return on the market portfolio is 10%. According to the capital asset pricing model: A. What is the risk premium on the market? B. What is the required return on an investment with a beta of 1.4? C. If an investment with a beta of 0.8 offers an expected return of 9.0% does it have positive or negative NPV? D. If the market expects a return of 11.0% from stock X, what is its beta?arrow_forwardThe analysts at FNB forecasted that the return on DJIA index portfolio over the coming year will be 14%. The one year T-Bill rate is 6%. While examining the recent returns of the DJIA index, the analysts estimated that the variance of these returns will be 12.4%. What is the degree of the risk aversion for the average investor, assuming the average portfolio resembles the DJIA indexarrow_forward
- Suppose the CAPM holds. You know that the average investor has a degree of risk aversion of 4.4. The current risk-free rate is 2.2%, inflation is estimated at 1.6%, and the volatility of the market is 14%. What is the market risk premium?arrow_forwardAssume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). a) Draw the security market line (SML) b) Use the CAPM to calculate the required return, on asset A. c) Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. d) Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. e) From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?arrow_forward
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