Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 8, Problem 2Q
(a)
Summary Introduction
To explain: The shape of the probability distribution for completely certain returns.
Probability Distribution:
The probability distribution shows all the expected values which a random variable can take within a given range. For creating a probability distribution, the maximum and minimum values are predetermined and within that range, the random variables occurring are shown.
(b)
Summary Introduction
To explain: The shape of the probability distribution for completely uncertain returns.
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The probability distribution of a less risky return is more peaked than that ofa riskier return. What shape would the probability distribution have for (a)completely certain returns and (b) completely uncertain returns?
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Answer whether each of the following statements is correct and explain your argument. \
(a) According to CAPM, the expected return of a risky asset is larger than the risk free rate.
(b) According to CAPM, the expected return of a risky asset increases with its variance.
(c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference.
(d) A less risk-averse investor has a steeper indifference curve for the utility function.
Chapter 8 Solutions
Fundamentals of Financial Management (MindTap Course List)
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. 10Q
Ch. 8 - Prob. 11QCh. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - Prob. 4PCh. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks A and B 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 2.0,...Ch. 8 - Prob. 10PCh. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...Ch. 8 - CAPM, PORTFOLIO RISK, AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 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. 6TCLCh. 8 - Prob. 7TCLCh. 8 - Prob. 8TCL
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Similar questions
- Which one of the following statements is correct? Group of answer choices The lower the average return, the greater the risk premium. The greater the volatility of returns, the greater the risk premium. The lower the volatility of returns, the greater the risk premium. The risk premium is not affected by the volatility of returns. The risk premium is unrelated to the average rate of return.arrow_forwardWhy will the standard deviation not be a good measure of risk when returnsare negatively skewed?arrow_forwardWhen, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? Never When the set of returns includes only risk-free rates. When all of the rates of return in the set of returns are equal to each other.arrow_forward
- In the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected excess return. (Assuming investors are risk-averse.) True or False?arrow_forwardWhich one of the following statements is correct? Multiple Choice The risk-free rate of return has a risk premium of 1.0. The reward for bearing risk is called the standard deviation. Risks and expected return are inversely related. The higher the expected rate of return, the wider the distribution of returns. Risk premiums are inversely related to the standard deviation of returns.arrow_forwardinvestments with low return variances usually: a. have a high return standard deviation b. have very high returns c. have realized returns higher than expected returns d. none of these options e. have realized returns close to exoexted returnsarrow_forward
- Risk means, in today's language, the probability of something bad happening or an unfortunate outcome. Risk in finance, however, is defined as the variance of the probability distribution of returns. a.) Why do these definitions seem contradictory? b.) Reconcile the two ideas.arrow_forwardWhat assumption about risk-adjusted techniques for measuring performance poses a potential problem? A. Portfolio risk is constant over time B. Returns are normally distributed C. Mean reversion D. None of the options are correct.arrow_forward(a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.arrow_forward
- Supposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?arrow_forwardThe Markowitz Model is based on several assumptions regarding investor behaviour. Which of the following is NOT an assumption? Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. Investors maximize one-period expected utility. Investors estimate the risk of the portfolios on the basis of the variability of expected returns. Investors base decisions solely on expected return and risk. None of the above answers [all are assumptions of the Markowitz Modelarrow_forwardIf two returns are positively related to each other, they will have a ________, and if they are negatively related to each other, the ______________. Group of answer choices positive covariance, covariance will be negative positive covariance, standard deviation will be negative negative covariance, covariance will be zero negative covariance, covariance will be positive This type of risk affects a large number of assets, each to a greater or lesser degree. Group of answer choices systematic risk unsystematic risk idiosynchratic risk principle of diversification True/False. The Dividend Discount Model can be applied to firms that do not pay dividends. Group of answer choices True Falsearrow_forward
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