EBK ESSENTIALS OF INVESTMENTS
10th Edition
ISBN: 8220102800267
Author: Bodie
Publisher: YUZU
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Textbook Question
Chapter 7, Problem 6PS
What is the expected
a. 15%.
b. More than 15%.
e. Cannot be determined without the risk-free rate.
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Students have asked these similar questions
risk-free rate have to be if they are correctly priced? (See Problems 19 and 20.)
11.4
CAPM Suppose the risk-free rate is 8 percent. The expected return on the market is
14 percent. If a particular stock has a beta of .60, what is its expected return based
on the CAPM? If another stock has an expected return of 20 percent, what must its
beta be? (See Problem 13.)
What will happen to a stock’s risk premium if its beta doubles and the market risk premium doubles?
A. The risk premium will be unchanged.
B. The risk premium will decrease by a factor of 2.
C. The risk premium will increase by a factor of 4.
D. The risk premium will increase by a factor of 2.
1. A stock with a beta of zero would be expected to have a rate of return equal to
a. the risk-free rate
b. the market risk premium
c. zero
d. the market rate of return
2. If an individual stock's beta is higher than 1.0, that stock is:
a. riskier than the market.
b. always the most attractive to investors.
c. less risky than the market.
d. exactly as risky as the market.
3. If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why is the firm's cost of debt lower?
a. Market interest rates have increased.
b. Additional debt can be issued more cheaply than the original debt.
c. Interest is deductible for tax purposes.
d. There should be no difference; cost of debt is the same as the bonds' market yield.
Chapter 7 Solutions
EBK ESSENTIALS OF INVESTMENTS
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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- (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_forwardAssume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.arrow_forwardQ6-Suppose that the rate of return on investment- free has risk %8 and the expected return rate for the market %14. If the particular stock his given B = 0.60 - What is the expected return rate based on CAPM? -How much the Beta of another stock that has required return 0.20 ?arrow_forward
- 14. Risk free asset, the market, and stock X have the expected returns of 2%, 8%, and 12% respectively. If X and the market has a covariance of 0.1503, what is the risk level of the market (as it is measured by the standard deviation)?arrow_forwardWhat is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? Select one: O a. None of these O b. 0.79 С. 1.30 O d. 1.57arrow_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 ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forward
- What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk - free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? Select one: а. 1.30 b. None of these с. 1.57 D. 0.79arrow_forwardAssume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: O is underpriced O is correctly priced. O will plot below the security market line. O will plot on the security market line. A Moving to another question will save this response. Question 4 of 30arrow_forwardWhich of the following statements is TRUE? O A. If the risk-free rate is 1.5% and the market risk premium is 6%, then the expected return on the market would be 4.5%. O B. CAPM is a model for relating unsystematic risk to the expected return on an asset. OC. According to CAPM, stocks with greater than average market risk would have an expected return lower than the expected return on the market. O D. If a company's beta is less than 1.0, then it is less risker than market.arrow_forward
- Suppose 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 have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forward
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