Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 7, Problem 2PS
Consider the statement: “If we can identify a portfolio with a higher Sharpe ratio than the S&P 500 Index portfolio, then we should reject the single-index
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Assume that both portfolios A and B are well diversified, that E(rA) = 22%, and E(rB) = 17%. If the economy has only one factor, and βA = 1.5, whereas βB = 1.1, what must be the risk-free rate? (Do not round intermediate calculations. Round your answer to two decimal places.)
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.
Rate of Return
Scenario
Market
AggressiveStock A
DefensiveStock D
Bust
–8
%
–13
%
–6
%
Boom
26
35
19
Required:a. Find the beta of each stock.b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Assume that both portfolios A and B are well diversified, that E(rA) = 16%, and E(rB) = 14%. If the economy has only one factor, and βA = 1.0, whereas βB = 0.8, what must be the risk-free rate? (Do not round intermediate calculations.)
Chapter 7 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - Prob. 8PSCh. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...
Ch. 7 - You arc a consultant to a large manufacturing...Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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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
- In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei) equal to 20% and 40 securities? A. 0.5% B. 3.16% C. 3.54% D. 12.5% E. 625%arrow_forwardWhich one of the following portfolios will have a beta of zero? a) A portfolio that is equally as risky as the overall market b) A portfolio that consists of a single stock c) A portfolio comprised solely of U. S. Treasury bills d) No portfolio can have a beta of zero.arrow_forwardConsider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −10% −5% Boom 19 25 15 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fairarrow_forward
- Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −5% −7%−3% Boom 27 35 19 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)? Please answer fast I give upvotearrow_forward1.Suppose you have $1000 to invest and are using two stocks (A and B) to construct a market-neutral portfolio. Based on your analysis, the weight for A = 37.4 (attention, it is 37.4, not 37.4%), calculate the weight for B. What do those numbers (the two weights) mean? **please don't use percentages to describe this, that is marked as incorrect**arrow_forwardWhich one of the following portfolios will have a beta of zero? Group of answer choices A portfolio that is equally as risky as the overall market A portfolio that consists of a single stock A portfolio comprised solely of U. S. Treasury bills No portfolio can have a beta of zero.arrow_forward
- Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −9% −5% Boom 29 35 20 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?arrow_forwardWhich of the following statements is most correct? A. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio. B. If you form a large portfolio of stocks each with a beta greater than 1.0, this portfolio will have more market risk exposure than a single stock with a beta of 0.8. C. Company-specific (or unsystematic) risk can be reduced by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk. D. Statements B and C are correct. E. All of the above statements are correct.arrow_forwardIn an environment with risk-free rate of zero, if Stock A has return of 10% and Beta of 1.0 and stock B has return of 8% with Beta of 0.5, find a zero-beta portfolio and state its return. [Note a negative amount indicates short-selling, which we assume is allowed here] Question 8 options: 67% in A, 33% in B; -3% -50% in A, 150% in B; 1% -100% in A, 200% in B; 6% 0% in A, 100% in B; 8%arrow_forward
- (c) Explain why, in general, the portfolio risk is lower than the weighted average of individual stocks’ risk. (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 ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forwardYou would like to combine a risky stock with a beta of 1.86 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardStock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. Group of answer choices Stock A would be a more desirable addition to a portfolio then Stock B. Stock B would be a more desirable addition to a portfolio than A. In equilibrium, the expected return on Stock A will be greater than that on B. In equilibrium, the expected return on Stock B will be greater than that on Stock A. When held in isolation, Stock A has more risk than Stock B.arrow_forward
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