FUND. OF FINANCIAL MGMT (LL)--W/ACCESS
9th Edition
ISBN: 9781337948982
Author: Brigham
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Chapter 8, Problem 3DQ
Summary Introduction
To identify: Company, which have high and low beta coefficient.
Beta Coefficient:
Beta coefficient evaluates the sensitivity of the stock in comparison with the market. It is a historical measure. It means it only takes past information into account.
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Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return?
Common Stock A
Common Stock B
Probability
Return
Probability
Return
0.35
13%
0.25
−7%
0.30
17%
0.25
8%
0.35
21%
0.25
15%
0.25
23%
(Click
on the icon
in order to copy its contents into a
spreadsheet.)
Question content area bottom
Part 1
a. Given the information in the table, the expected rate of return for stock A is
enter your response here%.
(Round to two decimal places.)
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return?
Common Stock A
Common Stock B
Probability
Return
Probability
Return
0.25
13%
0.25
−7%
0.50
14%
0.25
7%
0.25
18%
0.25
16%
0.25
23%
(Click on the icon in order to copy its contents into a spreadsheet.)
Question content area bottom
Part 1
a. Given the information in the table, the expected rate of return for stock A is
enter your response here
%. (Round to two decimal places.)
Part 2
The standard deviation of stock A is
enter your response here
%. (Round to two decimal places.)
Part 3
b. The expected rate of return for stock B is
enter your response here
%. (Round to two decimal places.)
Part 4
The standard deviation for stock B is
enter…
Q1: Explain the meaning and significance of a stock's beta coefficient. Illustrate your explanation by drawing, on
one graph, the characteristic lines for stocks with low, average, and high risk. (Hint: Let your three characteristic
lines intersect at r_i=r_m=6%, the assumed risk-free rate.)
Q2: Define the following terms, using graphs or equations to illustrate your answers where feasible.
a) Risk, stand-alone risk b) Expected rate of return c) standard deviation, variance d) risk premium for stock i,
market risk premium e) Capital Asset Pricing Model (CAPM)
f) Expected return on a portfolio g) market risk, diversifiable risk h) Beta i) Security Market Line; SML equation j)
Slope of SML and its relationship to risk aversion.
Q3. Differentiate between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured, and are
both concepts relevant for investors?
Q4. Can an investor eliminate market risk from a portfolio of common stocks? How many stocks must a portfolio…
Chapter 8 Solutions
FUND. OF FINANCIAL MGMT (LL)--W/ACCESS
Ch. 8 - Suppose you owned a portfolio consisting of...Ch. 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 20,000 invested...Ch. 8 - Prob. 3PCh. 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 - PORTFOLIO REQUIRED RETURN Suppose you are the...Ch. 8 - Prob. 8PCh. 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 - 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 13 have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SPCh. 8 - Prob. 23ICCh. 8 - Prob. 1DQCh. 8 - Prob. 2DQCh. 8 - Prob. 3DQCh. 8 - Select one of the four stocks listed in Question 3...Ch. 8 - Go back to the summary page to see an estimate of...Ch. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Beta pf CPB company Beta of the MSI Company is...
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- Assume that most of the investors in the stock market are active in an online chat group.As one of the investors holding ABC shares, you find out that the ABC stock has an expected return of 9.8% from the perspective of most investors in the chat group.In addition, you gathered the following information by carrying out market research. In your research, the market return is 6.8% and the risk-free rate is estimated to be 3%. The beta and past 1-month variance of Stock ABC is 1.2 and 7.8% respectively. The stock price exhibits an upward trend last week.What is the expected return of Stock ABC according to CAPM?arrow_forwardAssume that most of the investors in the stock market are active in an online chat group.As one of the investors holding ABC shares, you find out that the ABC stock has an expected return of 9.8% from the perspective of most investors in the chat group.In addition, you gathered the following information by carrying out market research. In your research, the market return is 6.8% and the risk-free rate is estimated to be 3%. The beta and past 1-month variance of Stock ABC is 1.2 and 7.8% respectively. The stock price exhibits an upward trend last week. Should you buy or sell Stock ABC if CAPM is correct? Why?arrow_forwardAssume that most of the investors in the stock market are active in an online chat group.As one of the investors holding ABC shares, you find out that the ABC stock has an expected return of 9.8% from the perspective of most investors in the chat group.In addition, you gathered the following information by carrying out market research. In your research, the market return is 6.8% and the risk-free rate is estimated to be 3%. The beta and past 1-month variance of Stock ABC is 1.2 and 7.8% respectively. The stock price exhibits an upward trend last week. With respect to your market research, suggest the information that you can use to determine your subsequent transaction in Stock ABC. You can assume the market is weak form efficient.arrow_forward
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