Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks’ prices and earned rates of return, (b) how this would affect risk premiums as measured by the historical difference between returns on stocks and returns on bonds, and (c) what the implications of this would be for the use of historical risk premiums when applying the SML equation.
a.
To explain: The influence of risk aversion on the stock prices and earned rates of return.
Market Interest Rate:
The market interest rate refers to that rate of interest, which is prevailing in the market at the present. The market interest rate is the rate which is offered on the deposits of cash. It depends upon the amount and the duration of the deposits.
The Risk Aversion:
The aversion of risk means taking lower risks on the investments. Risk aversion means the investor prefers the known risks in lower return investments but will not prefer those investments which have higher returns with unknown risks.
- The term risk aversion in case of an investment means that the investor is ready to take the known risks even if the investment gives a lower return...
b.
To explain: The affect on risk premiums as measured by the difference between returns on stocks and return on bonds.
Risk premium:
The risk premium refers to that amount which is the difference between the amount that is earned on a risk-free asset and the return, which is earned on the risky asset. This risk premium is the excess return on investment other than the risk-free rate of return on an investment that is expected to yield.
c.
To explain: The implications for the use of historical risk premium when the SML equation is applied.
Security Market Line:
The security market line is a graph of the Capital asset pricing model. The slope of the security market line calculates the market risk premium. In this line, the x-axis represents the risk, which is beta and the y-axis represents the expected return.
Chapter 8 Solutions
Additional Business Solutions
Find more solutions based on key concepts
Show solutions addTo put XOMs P/E ratio in perspective, it is useful to see how this ratio has varied over time. (If you go to Mo...
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
STOCK VALUATION Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Com...
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
A bank has capital of 200 and a leverage ratio of 5. If the value of the banks assets declines by 10 percent, t...
Principles of Macroeconomics (MindTap Course List)
Issuing Notes Payable On September 30, Bello International borrows $320,000 from Chase Bank with a 9-month, 8% ...
Cornerstones of Financial Accounting
List and briefly explain the three principles that describe how the economy as a whole works.
Brief Principles of Macroeconomics (MindTap Course List)
In a Gallup telephone survey conducted on April 9-10,2013, the person being interviewed was asked if he would v...
STATISTICS F/BUSINESS+ECONOMICS-TEXT
To match human resources supply and demand, how is attrition used?
Foundations of Business (MindTap Course List)
Accrued product warranty Fosters Manufacturing Co. warrants its products for one year. The estimated product wa...
Corporate Financial Accounting
Workplace Conflict: Six-Step Procedure to the Rescue. Although conflict is a normal part of every workplace, if...
Essentials of Business Communication (MindTap Course List)
Corrected trial balance The Lexington Group has the following unadjusted trial balance as of May 31, 2018: The ...
Financial & Managerial Accounting
Why have knowledge management systems become so important to businesses in recent years?
Accounting Information Systems
Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do e...
Principles of Economics (MindTap Course List)
The article Snow Cover and Temperature Relationships in North America and Eurasia (J. Climate and Applied Meteo...
Probability and Statistics for Engineering and the Sciences
What items would you include to figure out the opportunity cost of a vacation to Disney World?
Principles of Microeconomics (MindTap Course List)
(International Trade) Distinguish between a tariff and a quota. Who benefits from and who is harmed by such res...
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Activity-based costing for a service business Sterling Hotel uses activity-based costing to determine the cost ...
Financial And Managerial Accounting
In their three years at Vreeland Pharmaceuticals, Vitorio Nufios and Gary Shaw had rarely crossed paths, and th...
Management, Loose-Leaf Version
SERIES A PROBLEMS JOURNALIZING AND POSTING TRANSACTIONS Annette Creighton opened Creighton Consulting. She rent...
College Accounting, Chapters 1-27
England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per...
Essentials of Economics (MindTap Course List)
From the list that follows, identify the accounts that should be closed to the owners capital account at the en...
Financial Accounting
Refer to RE18-1. Assume that Parkers taxable income for Year 1 is 150,000. Prepare the journal entry to record ...
Intermediate Accounting: Reporting And Analysis
Fill in the missing amounts for the following bank reconciliation:
College Accounting (Book Only): A Career Approach
List the basic elements involved in developing a global marketing mix
MKTG 12:STUDENT ED.-TEXT
Define check tampering.
Accounting Information Systems
Summarize how marketing creates value through the four types of utility.
Contemporary Marketing
When a company faces a production constraint or scarce resource (e.g., only a certain number of machine hours a...
Managerial Accounting: The Cornerstone of Business Decision-Making
The following revenue transactions occurred during November: Record these three transactions into the following...
Financial Accounting
How can activity-based costing be used in service companies?
Financial & Managerial Accounting
INFLATION Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 an...
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Use the DFDs in Figures 11.3, 11.4, 11.6, and 11.8 (pp. 414, 415, 416, and 419) to solve this problem. Prepare ...
Pkg Acc Infor Systems MS VISIO CD
FIFO perpetual inventory The beginning inventory of merchandise at Dunne Co. and data on purchases and sales fo...
Accounting (Text Only)
Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate-demand ...
Principles of Macroeconomics (MindTap Course List)
The following transactions were completed by Nelsons Hardware, a retailer, during September. Terms on sales on ...
College Accounting (Book Only): A Career Approach
How does education add to a nations capital stock?
Exploring Economics
Table 1.7 shows data for seven colleges and universities. The endowment (in billions of dollars) and the percen...
Statistics for Business & Economics, Revised (MindTap Course List)
An employees total earnings is called gross pay.
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
In April of the current year, Steelman Press Company transferred Ken Sherm from its factory in Louisiana to its...
PAYROLL ACCT.,2019 ED.(LL)-TEXT
In Exhibit 5 if the required reserve ratio is 20 percent for all banks and every bank in the banking system loa...
Economics For Today
Certain industries, such as the computer industry, are faced with constantly changing technologies, short produ...
Purchasing and Supply Chain Management
Unlike the small logistics models presented here, real-world logistics problems can be huge. Imagine the global...
Practical Management Science
Appendix Sales-related and purchase-related transactions using periodic inventory system Selected transactions ...
Corporate Financial Accounting
Which of the following is a true statement about activity-based customer costing? a. Customer diversity require...
Cornerstones of Cost Management (Cornerstones Series)
Ethics and professional conduct in business Sisel Company has two divisions, the Optic Lens Division and the Ca...
Survey of Accounting (Accounting I)
In Exhibit 4(b), determine the slope between points A and D.
Economics (MindTap Course List)
