A stock had a 12% return last year, a year when the overall stock market declined. Does thismean that the stock has a negative beta and thus very little risk if held in a portfolio? Explain.
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A stock had a 12% return last year, a year when the overall stock market declined. Does this
mean that the stock has a negative beta and thus very little risk if held in a portfolio? Explain.
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- A stock had a 12 percent return last year, a year when the overall stock market declined. Does this mean that the stock has a negative beta and thus very little risk if held in a portfolio?A stock will have a loss of 14.6 percent in a recession, a return of 13.3 percent in a normal economy, and a return of 28 percent in a boom. There is 23 percent probability of a recession, 26 percent probability of normal economy, and 51 percent probability of boom. What is the standard deviation of the stock's returns?27 - Which of the following statements is CORRECT? Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period. Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move. You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks. If the market risk premium remains constant, but the…
- LaPorta, Lakonishok, Shleifer, and Vishny (\Good News for Value Stocks," Journal of Finance, (June 1997) study the returns on stocks on the few days surrounding their quarterly earnings announcements (relative to various expected return benchmarks). They found that on average, high-B/M stocks earn 0.9% around an earnings announcement. In contrast, low-B/M stocks earn an average of -0.1% around an earnings announcement. The dierence is statistically significant. (i) High returns around earnings announcements are more likely to occur if the earnings surprise is . (Fill in the blank with \positive" or \negative".) (ii) Discuss whether the return pattern found by LaPorta et al. (1997) around earnings announcements is more consistent with the irrational expectations (behavioral) view, or the risk factor (ecient markets) view of the book-to-market effect, and explain your logic.You have been following a stock for 6 months and the following is its past return Year 1: -5% Year 2: -10% Year 3: 15% Year 4: 5% Year 5: 10% Year 6: 15% What is the expected return and standard deviation of the stock based on the historical data? Assume normal distribution, what is VaR at 5% for this stock? What is the Sharpe ratio of the stock based on historical data, risk free rate is 1%?Blue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent respectively. What is the standard deviation of the returns on this stock? Can the calculator an excel solution be provided?
- Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the return during a given week and the return during the following week is zero. C. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. One could have made higher-than-average capital gains by holding stocks with low dividend yields.Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain.a. The average rate of return is significantly greater than zero.b. The correlation between the return during a given week and the return during the following week is zero.c. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.d. One could have made higher-than-average capital gains by holding stocks with low dividend yields.A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. All else equal, which one of the following will lower the overall expected rate of return on this stock? A decrease in the probability of a recession occurring An increase in the rate of return in a recessionary economy A decrease in the probability of an economic boom
- A stock with a beta of 1.8 has an expected rate of return of 16%. If the market return this year turns out to be 6 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)Subject: Financial strategy & policy 8-6: A stock had a 12% return last year, a year when the overall stock market declined. Does this mean that the stock has a negative beta and thus very little risk if held in a portfolio? Explain. 8-7: If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain. 8-8: If a company’s beta were to double, would its required return also double?You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –9 percent, 16 percent, 21 percent, and 3 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on the company’s stock?