PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 11PS
Summary Introduction
To discuss: The reason why investment L is safer for diversified investor.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Consider the following information regarding a new investment that a company intends toundertake:.State of the Economy Probability Market Return Investment ReturnExpansion 0.30 40% 60%Normal 0.50 10% 25%Recession 0.20 -15% -40%a). Compute the variance and standard deviation of each b). Compute the correlation between the market the investment return(s) c). Compute the beta of the investment d). Assuming the risk free rate is 5% p.a. Compute the required rate return and advice if the investment is worth undertaken.
An investment firm is considering two alternative investments, A and B, under two possible future sets of economic conditions, good and poor. There is a .60 probability of good economic conditions occurring and a .40 probability of poor economic conditions occurring. The expected gains and losses under each economic type of conditions are shown in the following table: Economic Conditions Investment Good Poor A $900,000 –$800,000 B 120,000 70,000 Using the expected value of each investment alternative, determine which should be selected.
Betas and risk rankings Personal Finance Problem You are considering three stocks -A, B, and C- for possible inclusion in your investment portfolio. Stock A has a beta of 1.2,
stock B has a beta of 1.5, and stock C has a beta of - 0.2.
a. Rank these stocks from the most risky to the least risky.
b. If you believed that the stock market was getting ready to experience a significant decline, which stock should you add to your portfolio?
c. If you anticipated a major stock market rally, which stock would you add to your portfolio?
a. Which stock is the most risky one? (Select the best answer below.)
O A. Stock A
O B. Stock B
O C. Stock C
Which stock is the least risky one? (Select the best answer below.)
O A. Stock B
O B. Stock A
O C. Stock C
b. If you felt that the stock market was getting ready to experience a significant decline, which stock should you add to your portfolio? (Select the best answer below.)
b. If you felt that the stock market was getting ready to experience a…
Chapter 7 Solutions
PRINCIPLES OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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 Curry Company is analyzing two capital investments. The financial vice president insists on examining the risk of the projects in terms of their effect on the risk of a diversified portfolio. The standard deviation of Projects X and Y are 10.2% and 8.4%, respectively. The expected return for a diversified portfolio is 15% with a standard deviation of 4.5%. The correlation coefficient between Project X and the portfolio is 0.65. Between Project Y and the portfolio, the correlation coefficient is 0.81. The expected returns are 18.1% for Project X and 18.8% for Project Y. The risk-free rate is 8%. Which investment(s) should the company ассept?arrow_forwardRisk analysis Green Energy is considering expanding its investment in renewable energy generation. Two possible types, wind and solar, of energy generation are under review. After investigating the possible outcomes, the company made the estimates shown in the following table: . The pessimistic and optimistic outcomes occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%. a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that solar farm's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? is less risky because it has a range for the rate of return. c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? (Select the…arrow_forwardCalculate the required rate of return for an asset that has a beta of 1.01, given a risk-free rate of %3.4 and a market return of %9.1 . b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to %11.6, what is the required rate of return for the same asset? a. The required rate of return for the asset is enter your response here%. (Round to two decimal places.) Part 2 b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 11.6%, the required rate of return for the same asset is enter your response here%. (Round to two decimal places.)arrow_forward
- Imagineering, Inc., is considering an investment in CADCAM compatible design software with the cash flow profile shown in the table below. Imagineering’s MARR is 18%/year. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Imagineering invest?arrow_forwardWhich is perceived to be the riskier investment? The rate of return for a restaurant is estimated to be 15% annually. The rate of return for a movie producer is estimated to be 25% annually O a. Restaurant b. Movie producer O c. Both are equally perceived O d. All investments earn the same risk adjusted returnarrow_forwardImagineering, Inc., is considering an investment in CAD-CAM compatible design software with the cash flow profile shown in the table below. Imagineering’s MARR is 18%/year. Solve, a. What is the future worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on future worth? c. Should Imagineering invest?arrow_forward
- Give typing answer with explanation and conclusion Exactly one year ago, an investor made an investment in investment in Braodcom (AVGO). At that time, the current risk-free rate was 0.69%, the beta for AVGO was 1.35, and the market risk premium was estimated at 6.2%. Over the year, the realized return for AVGO was 7.11%. What was the risk-adjusted return (alpha) for AVGO over the year?arrow_forwardConsider a position consisting of a $65,080 investment in Shin’s Korean Technology (SHIT) and a $22,210 investment in Coca-Cola Company (KO). Suppose that the daily volatilities of these two assets are 2.14% and 2.71% respectively and that the coefficient of correlation between their return is 0.4168. With an assumption that it follows the normally distributed returns, the 32-day 95% Value at Risk (VaR) for Shin’s Korean Technology (SHIT) is closest to A. $16,620.41. B. $14,816.56. C. $12,958.76. D. $10,007.37.arrow_forwardRisk and NPV; Sensitivity Analysis J. Morgan of SparkPlug Inc. has been approached to takeover a production facility from B.R. Machine Company. The acquisition will cost $1,500,000, andthe after-tax net cash inflow are expected to be $275,000 per year for 12 years.SparkPlug currently uses 12% for its after-tax cost of capital. Tom Morgan, production manager,is very much in favor of the investment. He argues that the total after-tax net cash inflow is more thanthe cost of the investment, even if the demand for the product is somewhat uncertain. “The project willpay for itself even if the demand is only half the projected level.” Cindy Morgan (corporate controller)believes that the cost of capital should be 15% because of the declining demand for SparkPlug products.Required1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 12%? Use thebuilt-in NPV function in Excel; round your answer to the nearest whole dollar. 2. What is the estimated NPV of…arrow_forward
- Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint: Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability 25% Boom Asset M Return 12% 10% Normal Recession 4% 49% 26% Asset N Return 21% 14% 1% Asset O Return 4% 10% 12% - Xarrow_forwardConsider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVS of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Standard deviation of project's expected NPVS Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project A has more corporate risk than Project B. Project A $80,000 1.2 0.7 Project B has more corporate risk than Project A. Project A has more market risk than Project B. Project B $40,000 1.0 0.9arrow_forwardConsider an investment to an asset in a region with opportunity of a small war. The earnings per share (EPS) also depend of oil prices. In case of High oil prices small war will happen with probability 5% and earnings will be $0.5 per share. If small war does not occur under High oil prices earnings per share will be $1.4 In case of Low oil prices small war will happen with probability 40% and earnings will be $0.5 per share. If small war does not occur under High oil prices earnings per share will be $1.3 Is is evaluated from historical data that oil prices will be High with probability 20% Find Total Variance of EPS hint: find marginal probabilities of each EPS value: 0.5, 1.3 and 1.4; then use these probabilities and values to find usual unconditional variancearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Internal Rate of Return (IRR); Author: The Finance Storyteller;https://www.youtube.com/watch?v=aS8XHZ6NM3U;License: Standard Youtube License