Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781337587563
Author: MOYER, R. Charles; McGuigan, James R.; Rao, Ramesh P.
Publisher: Cengage Learning
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Question
Chapter 8, Problem 17P
a)
Summary Introduction
To determine: Probability incurring a loss (negative rate) from investing in stock.
b)
Summary Introduction
To determine: Probability of earning a rate of return less than risk free of 6%.
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Consider the following information about two stocks (D and E) and two common risk factors (factor 1 and factor 2)
Stock
Risk factor 1
Risk factor 2
Expected return (%)
D
1.2
3.4
13.1
2.6
2.6
15.4
a. Assuming that the risk free rate is 5%, determine the risk premium for factors 1 and 2 that are consistent with the expected returns for the two stocks.
You expect that in one year the prices of Stock D and E will be $55 and $36 respectively and pay no dividends. What should be the price of each stock today to be consistent with the expected return levels.
b.
C.
Determine how to you identified if Stock D and E are overvalued, fairly valued and undervalued?
d. Suppose the risk premium for factor 1 as computed in (a) increases by 0.25 percent, what will be the new expected return for D and E?
e. Suppose the risk premium for factor 1 as computed in (a) decreases by 0.25%, what will be the new expected return for D and E?
f. Devise how would you develop a Jensen Index using Arbitrage Pricing…
Assume that the expected return and standard deviation of the company stock will be 17 percent, respectively. How appropriate is the sharpe ratio for these assets? When would you use the sharpe ratio?
a. Given the following holding-period returns,
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,
compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is
1.87
and the risk-free rate is
6
percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk?
Month
Zemin Corp.
Market
1
5
%
6
%
2
2
1
3
2
0
4
−4
−1
5
4
3
6
3
4
Chapter 8 Solutions
Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 8 - Prob. 1QTDCh. 8 - Prob. 2QTDCh. 8 - Prob. 3QTDCh. 8 - Prob. 4QTDCh. 8 - Prob. 5QTDCh. 8 - Prob. 6QTDCh. 8 - Prob. 7QTDCh. 8 - Prob. 8QTDCh. 8 - Prob. 9QTDCh. 8 - Prob. 10QTD
Ch. 8 - Prob. 11QTDCh. 8 - Prob. 12QTDCh. 8 - Prob. 13QTDCh. 8 - Prob. 14QTDCh. 8 - Prob. 15QTDCh. 8 - Prob. 16QTDCh. 8 - Prob. 17QTDCh. 8 - Prob. 18QTDCh. 8 - Prob. 19QTDCh. 8 - Prob. 20QTDCh. 8 - Prob. 21QTDCh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 12PCh. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 21PCh. 8 - Prob. 22PCh. 8 - Prob. 23PCh. 8 - Prob. 24PCh. 8 - Prob. 25PCh. 8 - Prob. 26PCh. 8 - Prob. 27PCh. 8 - Prob. 28P
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