CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196239
Author: Bodie
Publisher: MCG
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Chapter 5, Problem 9PS
Using the historical risk premiums as your guide, what is your estimate of the expected annual HPR on the market index stock portfolio if the current risk-free interest rate is 3%? (LO 5-3)
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Using Table 5.3 as your guide, what is your estimate of the expected annual HPR on the market index stock portfolio if the current risk-free interest rate is 4.4%? (Round your answer to 2 decimal places.)
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) + 6.5 Change in energy prices 0.5 Change in long-term interest rates +2.9 Calculate expected rates of return on the following stocks. The risk - free interest rate is 6.8%. A stock whose return is uncorrelated with all three factors
Consider a three-factor APT model. The factors and associated risk premiums are:
Factor
Risk Premium (%)
Change in gross national product (GNP)
+6.9
Change in energy prices
0.4
Change in long-term interest rates
+2.6
Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.8%.
A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.)
A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.)
A pure-play energy stock with high exposure to the energy factor (b = 1.9) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.)
An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.9 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices…
Chapter 5 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
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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- Stock M has a relevant risk equals 1.75, and unsystematic risk equals 2. If the real risk-free rate of interest equals 3 percent, inflation premium equals 2 percent, expected market return equals 11 percent, and the required rate of return on a portfolio consisting of all stocks, which is the market portfolio equals 11 percent, what is Stock M's required rate of return? Interpret your answer.arrow_forwardWhat are the components of the risk-free rate and What is financial risk? If the standard deviation of a stock’s return is 5% and its expected return is 8%, what it the C.V.?arrow_forwardThe risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is the required rate of return on the stock, E(Ri)? Use the CAPM equation.arrow_forward
- Using historical risk premiums from Table 5.5 over the 1927-2021 period as your guide, what would be your estimate of the expected annual HPR on the Big/Value portfolio if the current risk-free interest rate is 2.40%? \tablell, Market Index, Big/growth Big/ value, Small/growth.Small/value], [A.1927-2021.....1 [Mean excess return (annualized), 8.86, 8.79, 12.02, 9.60, 15.54], [Standard deviation (annualized), 18.52, 18.35, 24 83, 25.97, 28.23] [Sharpe ratio,048, 0.48,0.48, 0.37, 0.55], Iower partial SD (annualzed ) 19.62, 18.85, 23.61, 25.86, 26.33], [Skew, 0.17, 0.11, 1:50, 0.59, 2.06] [Kurtosis, 7.61, 5.47, 17.58,7.10, 21.60], [VaR (1%) actual ( monthly) returns.-13.58,14.40, 1993, 20.10,20.68], [VaR(1) normal distribution. -11.75,-11.64,15.75-1669-17.78], (% of monthly retums more than 3,... [SD below mean 0.88% 0.79% 0.88%,0.79% 0.62%arrow_forwardHow do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.arrow_forwardQ21. Suppose your expectations regarding the stock price are as follows: Time Return 1 0.10 2 -0.15 3 0.20 4 0.15 5 -0.20 6 0.30 7 -0.10 a. Calculate the excess return assuming that the risk-free rate is 5%. b. Calculate the risk premium. c. Calculate the Sharpe ratio. d. Calculate the risk adjusted return.arrow_forward
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- Consider the following simplified APT model: Factor Market Expected Risk Premium (%) Interest rate Yield spread 6.2 -0.8 4.8 Factor Risk Exposures Market ( Interest Rate ( Yield Spread ( Stock b₁ ) P 1.0 p2 1.0 p3 0.3 b2 ) -1.4 0 2.1 b3 ) -0.6 0.1 0.6 = : 3.8%. Calculate the expected return for each of the stocks shown in the table above. Assume rf Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Expected return P 7.80% Expected return P2 10.38% Expected return P3 %arrow_forward(d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forwardYou are trying to figure out the risk-free rate estimate. Here is information about a stock's CAPM return: The beta is 0.9 The market risk premium is 5.2% The stock's return is 10% Given this information, what is the estimate for the risk-free rate? Answer:arrow_forward
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