Fundamentals Of Financial Management
14th Edition
ISBN: 9781305629080
Author: Eugene F. Brigham, Joel F. Houston
Publisher: South-western College Pub (edition 14)
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Question
Chapter 8, Problem 22SP
a.
Summary Introduction
To determine: The average
Risk and Return:
The risk and return are two closely related terms. The risk is the uncertainty attached to an event. In case of any investment, there is some amount of risk attached to it as there can be either gain or loss. While return in the financial term is that percentage which represents the profit in an investment.
Higher risk is associated with higher return and lower risk has a probability of lower return. The investor has to face a tradeoff between risk and return in terms of an investment.
Annual Rate of Return:
The annual rate of return refers to that return which is charged or is earned on an investment for a year. This rate is expressed in percentage.
b.
Summary Introduction
To prepare: The standard deviation for the given data.
Standard deviation:
The standard deviation refers to the stand-alone risk associated with the securities. It measures how much a data is dispersed with its standard value. The Greek letter sigma represents the standard deviation.
c.
Summary Introduction
To determine: The coefficient of variation.
The coefficient of variation:
The coefficient of variation is a tool to determine the risk. It determines the risk per unit of return. It is used for measurement when the expected returns are same for two data.
d.
Summary Introduction
To prepare: A scatter diagram showing the company’s returns and the index returns.
e.
Summary Introduction
To determine: The beta of the B Industries and R Inc. by running regressions of their returns.
f.
Summary Introduction
To determine: The required returns of the two companies by security market line equation.
g.
Summary Introduction
To determine: The beta and the required return for a newly constructed portfolio.
h.
Summary Introduction
To determine: The new portfolio’s required return.
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(Solving a comprehensive problem) Use the end-of-year stock price data in the popup window,, to answer the following questions for the Harris and
Pinwheel companies.
a. Compute the annual rates of return for each time period and for both firms.
b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may
assume that neither firm pays any dividends.)
c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4).
d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation:
1 +
Three-Year
Rate of Return
1 +
Annual Rate
of Return
3
e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has
been held for several…
1.)
Given this return data, the average realized return on Happy Dog Soap Inc.’s stock is _______ .
2.)
The preceding data series represents a sample of Happy Dog’s historical returns. Based on this conclusion, the standard deviation of Happy Dog’s historical returns is _______ .
3.)
If investors expect the average realized return on Happy Dog Soap Inc.’s stock from 2016 to 2020 to continue into the future, its expected coefficient of variation (CV) is expected to equal _______ .
Review the excerpted table of historic returns shown below. The returns have all been annualized after having calculated monthly returns for the previous ten years. In addition, information is provided about the average, the volatility, and the sensitivity of the possible investments.
Time Period #
Market Return
Firm W
Firm X
Firm Y
Firm Z
T-Bill
1
0.333
0.191
0.218
0.955
0.601
0.035
2
-0.144
-0.423
-0.632
-0.747
-0.472
0.039
3
0.143
0.348
0.470
0.379
0.378
0.040
4
0.316
0.871
0.868
-0.192
0.502
0.036
5
0.178
0.912
0.499
0.694
0.364
0.036
6
-0.014
0.532
0.168
-0.671
-0.064
0.038
…
…
…
…
…
…
…
…
…
…
…
…
…
…
119
0.374
0.556
1.014
0.023
0.698
0.037
120
0.173
0.547
0.092
0.658
0.222
0.036
Average Return
0.082
0.113
0.067
0.167
0.121
0.029
Standard…
Chapter 8 Solutions
Fundamentals Of Financial Management
Ch. 8 - Prob. 1QCh. 8 - Prob. 2QCh. 8 - Prob. 3QCh. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8QCh. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 1P
Ch. 8 - PORTFOLIO BETA An individual has 35,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks X and Y have the following...Ch. 8 - Prob. 7PCh. 8 - BETA COEFFICIENT Given the following information...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 1.5,...Ch. 8 - CAPM AND REQUIRED RETURN Bradford Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14%...Ch. 8 - CAPM, PORTFOLIO RISK. AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - Prob. 15PCh. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SPCh. 8 - Prob. 23ICCh. 8 - Prob. 1TCLCh. 8 - Prob. 2TCLCh. 8 - Prob. 3TCLCh. 8 - Using Past Information to Estimate Required...Ch. 8 - Prob. 5TCLCh. 8 - Prob. 7TCLCh. 8 - Prob. 8TCL
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