PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 9, Problem 13PS
Measuring risk The following table shows estimates of the risk of two well-known Canadian stocks:
- a. What proportion of each stock’s risk was market risk, and what proportion was specific risk?
- b. What is the variance of Toronto Dominion? What is the specific variance?
- c. What is the confidence interval on Loblaw’s beta? (See page 227 for a definition of “confidence interval.”)
- d. If the
CAPM is correct, what is the expected return on Toronto Dominion? Assume a risk-free interest rate of 5% and an expected market return of 12%. - e. Suppose that next year the market provides a zero return. Knowing this, what return would you expect from Toronto Dominion?
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The following table shows estimates of the risk of two well-known Canadian stocks:
Standard
Standard
Deviation (%)
R2
Beta
Error of Beta
Sun Life Financial
25.7
0.19
0.95
0.16
Loblaw
30.5
0.01
0.21
0.27
What proportion of each stock’s risk was market risk, and what proportion was specific risk?
What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
What is the confidence interval on Loblaw's beta?
If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 4% and an expected market return of 13%.
Suppose that next year, the market provides a 18% return. Knowing this, what return would you expect from Sun Life?
The following table shows estimates of the risk of two well-known Canadian stocks:
Standard Deviation (%)
R2raise to the power of 2
Beta
Standard Error of Beta
Sun Life Financial
25.7
0.19
0.93
0.12
Suncor Energy
26.5
0.02
0.70
0.27
What proportion of each stock’s risk was market risk, and what proportion was specific risk?
What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
What is the confidence interval on Suncor’s beta?
If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 4% and an expected market return of 14%.
Suppose that next year, the market provides a 14% return. Knowing this, what return would you expect from Sun Life?
When working with the CAPM, which of the following factors can be determined with the most precision?
a. The most appropriate risk-free rate, rRF.
b. The market risk premium (RPM).
c. The beta coefficient, bi, of a relatively safe stock.
d. The expected rate of return on the market, rM.
e. The beta coefficient of "the market," which is the same as the beta of an average stock.
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- (Expected rate of return and risk) 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 Return0.20 10% 0.15 -4% 0.60 16% 0.35 7%0.20 21% 0.35 13% 0.15 20% a) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock A? What is the standard deviation? b. Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, what is the expected rate of return for stock B? What is the standard deviation? c. Based on the risk (as measured by the standard deviation) and return of each stock, which…arrow_forwardSuppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forwardWhen working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forward
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