Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 6, Problem 13PS
Stocks offer an expected
a. In light of the apparent inferiority of gold to stocks with respect, to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.
b. How would you answer (a) if the correlation coefficient between gold and stocks were 1? Draw a graph illustrating why one would or would not hold gold.
c. Could these expected returns, standard deviations, and correlation represent an equilibrium for the security market?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%.a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.b. Given the data above, reanswer (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. c. Could the set of assumptions in part (b) for expected returns, standard deviations, and correlation represent an equilibrium for the security market?
Consider the following information for Stocks A,B, and C. The returns on the three stocks are positively correlated, but they are not perfectlycorrelated. (That is, each of the correlation coefficients is between 0 and 1.)
Stock Expected Return Standard Deviation BetaA 9.55% 15% 0.9B 10.45 15 1.1C 12.70 15 1.6
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.)a. What is the market risk premium (rM - rRF)?b. What is the beta of Fund P?c. What is the required return of Fund P?d. Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%,or greater than 15%? Explain.
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
Stock
Expected Return
Standard Deviation
Beta
A
8.90%
14%
0.8
B
10.55
14
1.1
C
13.30
14
1.6
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 4.5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
What is the market risk premium (rM - rRF)? Round your answer to one decimal place.
%
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
%
What would you expect the standard deviation of Fund P to be?
Less than 14%
Greater than 14%
Equal to 14%
Chapter 6 Solutions
Essentials Of Investments
Ch. 6.5 - Prob. 1EQCh. 6.5 - In light of each firm’s exposure to the financial...Ch. 6 - Prob. 1PSCh. 6 - When adding a risky asset to a portfolio of many...Ch. 6 - A portfolio’s expected return is 12%, its standard...Ch. 6 - An investor ponders various allocations to the...Ch. 6 - The standard deviation of the market-index...Ch. 6 - Suppose that the returns on the stock fund...Ch. 6 - Use the rate-of-return data for the stock and bond...Ch. 6 - Prob. 8PS
Ch. 6 - Prob. 9PSCh. 6 - Prob. 10PSCh. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Stocks offer an expected rate of return of 10%...Ch. 6 - Suppose that many stocks are traded in the market...Ch. 6 - You can find a spreadsheet containing annual...Ch. 6 - Assume expected returns and standard deviations...Ch. 6 - Prob. 17PSCh. 6 - Prob. 18PSCh. 6 - A project has a 0.7 chance of doubling your...Ch. 6 - Investors expect the market rate of return this...Ch. 6 - The following figure shows plots of monthly rates...Ch. 6 - Prob. 22PSCh. 6 - Prob. 23PSCh. 6 - Prob. 25CCh. 6 - Prob. 1CPCh. 6 - Prob. 2CPCh. 6 - Abigail Grace has a $900,000 fully diversified...Ch. 6 - Prob. 4CPCh. 6 - Prob. 5CPCh. 6 - Prob. 6CPCh. 6 - Prob. 7CPCh. 6 - Prob. 1WMCh. 6 - Following the procedures in the previous question,...Ch. 6 - Prob. 3WMCh. 6 - Prob. 4WM
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The beta coefficient for Stock C is βc = 0.4 and that for Stock D is βd = -0.5 (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.) a. If the risk-free rate is 9% and the expected rate of return on an average stock is 13%, what are the required rates of return on Stocks C and D? b. For Stock C, suppose the current price, Po, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock were not in equilibrium.arrow_forwardConsider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 11.45% 14% 0.9 B 12.55 14 1.1 C 15.30 14 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) What is the market risk premium (rM - rRF)? Round your answer to one decimal place. % What is the beta of Fund P? Do not round intermediatearrow_forwardGiven the following information.is it possible to infer anything about the standard deviation of an individual mining stock Howdy-Doo Ltd: Howdy-Doo Ltd shares have an expected return of 13%. The market porfolio has an expected return of 11% and standard deviation of 22%. The risk-free rate is 5%.\ Assume the market is currently fairly-price and that CAPM theory holds.Hint:the maximum value of correlation coefficient is 1. A.Yes,standard deviation is less than 29.33% B.Yes,the standard deviation is equal to 29.33% C.No,as it is not possible to calculate its beta D.No,as it is not possible to calculate standard deviation without a sample of returns E.Yes,the standard deviation is more than 29.33%arrow_forward
- Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.47% 14% 0.7 B 12.44 14 1.3 C 13.92 14 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (That is, required returns equal expected returns.) What is the market risk premium (rM - rRF)? Round your answer to two decimal places. % What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. % Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%? Less than 14% Greater than 14%…arrow_forwardConsider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. Expected Standard Stock Return Deviation Beta A 10% 20% 1.0 B 10% 10% 1.0 C 12% 12% 1.4 Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT? a. Portfolio AB's coefficient of variation is greater than 2.0. b. Portfolio AB's required return is greater than the required return on Stock A. c. Portfolio ABC's expected return is 10.66667%. d. Portfolio ABC has a standard deviation of 20%. e. Portfolio AB has a standard deviation of 20%.arrow_forwardStock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT? a. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued. b. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued. c. Portfolio AB's expected return is 11.0%. d. Portfolio AB's beta is less than 1.2. e. Portfolio AB's standard deviation is 17.5%.arrow_forward
- Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.7 on the market index. Firm-specific returns all have a standard deviation of 25%. Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.5%, and the other half have an alpha of -2.5%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks. a. What is the expected profit (in dollars) and standard deviation of the analyst's profit (round to nearest whole dollar amount)? Expected profit (in dollars) Standard deviation b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks (round to nearest whole dollar amount)? 50 stocks 100 stocks Standard deviatonarrow_forwardAssume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.6 on the market index. Firm-specific returns all have a standard deviation of 25%. Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.5%, and the other half have an alpha of −2.5%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks. a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)arrow_forwardConsider an economy with just two assets. The details of these are given below. Number of Shares Price Expected Return Standard Deviation A 100 1.5 15 15 B 150 2 12 9 The correlation coefficient between the returns on the two assets is 1=3 and there is also a risk-free asset. Assume the CAPM model is satisfied. (1) What is the expected rate of return on the market portfolio? (2) What is the standard deviation of the market portfolio? (3) What is the beta of stock A? (4) What is the risk-free rate of return?arrow_forward
- Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT? a. If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount. b. A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market. c. If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y. d. Stock Y must have a higher expected return and a higher standard deviation than Stock X. e. If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.arrow_forwardYou are using the CAPM to calculate a fair return for Stardust common stock. The shares have a volatility of 28.00%, while the market has a volatility of 15.00%. The correlation between the two sets of returns is 0.3. The risk free rate is 2.60%, while the expected return on the market is 4.80%. What is the fair return for Stardust common stock?arrow_forwardSuppose there are only two stocks in the entire market, Stock A and Stock B. Stock A has an expected return of 8% and a standard deviation of 15%. Stock B has an expected return of 14% and a standard deviation of 20%. Their market capitalizations are both $3,000,000. The correlation between stock A and stock B is 0.3. The risk free rate is 4.5%. If you were only able to hold either the market portfolio or Stock A in isolation, and held no other assets (including T-Bills), is it clear which one you would choose? Why?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License