Baghiben Problem 13-26 Systematic versus Unsystematic Risk [LO3]Consider the following Information about Stocks I and II:Rate of Return if StateOccursState of EconomyRecessionProbability of State of-EconomyStock IStock II2004.35Normal.6026.15Irrational exuberance2010.55The market risk premium is 5 percent, and the risk-free rate is 4 percent. (Do not roundIntermediate calculations. Enter your standard deviation answers asrounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimala percentplaces, e.g., 32.16.)The standard deviation on Stock I's return isdeviation on Stock Il's return isstock's systematic risk/beta, Stockpercent, and the Stock I beta isThe standardpercent, and the Stock II beta isTherefore, based on theis "riskier"

1. Calculate the Expected Return for Each Stock: - Stock I: \( (0.2 \times 0.04) + (0.6 \times…

Answered: Problem 13-26 Systematic versus…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

( t nces Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: State of Economy Recession Normal Irrational exuberance Probability of State of Economy 25 45 30 Rate of Return if State Occurs The standard deviation on Stock I's return is deviation on Stock Il's return is stock's systematic risk/beta, Stock Stock I 02 30 08 Stock II -.33 13 53 The market risk premium is 8 percent, and the risk-free rate is 5 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) percent, and the Stock I beta is percent, and the Stock Il beta is is "riskier". The standard Therefore, based on the
QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68
b. Assuming the capital asset than Stock B's beta by .30, what is the expected market risk 30. Systematic versus Unsystematic Risk Consider the following information LO 3 on Stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession -.22 .04 .25 Normal .15 .60 .22 Irrational exuberance .15 .16 .45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more unsystematic risk? Which stock is "riskier"? Explain.
Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: State of Economy Recession Normal Irrational exuberance Probability of State of Economy 28 53 19 Rate of Return if State) Occurs The standard deviation on Stock I's return is t deviation on Stock It's return is stock's systematic risk/beta, Stock Stock I .05 17 .06 Stock Il -20 .07 40 The market risk premium is 8 percent, and the risk-free rate is 2 percent. (Do not round. intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) percent, and the Stock I beta is percent, and the Stock ill beta is "riskier". The standard Therefore, based on the
Question 7 Consider the following Information: Portfolio ER Risk Free Market SD 6.00 13.2 A 11.2 a. Calculate the Sharpe ratios for the market portfolio and portfolio A Sharpe Ratio=(Return on portfolio-Riskfreerate)/SD Market Portfo 0.2 Portfolio A 0.21 2.1 b. If the simple CAPM is valid, is the above situation possible? 0.00 36 25 Beta Market Beta A
Stock A B Expected Return 10% 15 Correlation-1 Standard Deviation 5% 10 Suppose that it is possible to borrow at the risk-free rate, r What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)
Problem 7-12 Suppose that there are many stocks In the security market and that the characteristics of stocks A and Bare glven as follows: Expected Standard Stock Return Deviation A 10 48 19 11 Correlation = -1 Suppose that It is possible to borrow at the risk-free rate, rĘ What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfollo from stocks A and B.) (Do not round Intermedlate calculations. Round your answer to 3 decimal places.) Risk-free rate
13:19 M O - Fnan301FinalExamFall2...ba1995f96f6315dff9f7 5 ii) Capital gains yield iii) Total rate of return (yield) 4. Based on the following information Calculate State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.20 0.05 -0.17 Normal 0.55 0.08 0.12 Вoom 0.25 0.13 0.29 a) The expected return of Stock A (7.5 points) b) The expected return of Stock B (7.5 points) c) The expected return of Portfolio where you invest $35,000 in Stock A and $45,000 in Stock B (5 points) d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.3. If you invest $35,000 in Stock A and $45,000 in Stock B, what is the beta of this portfolio? (5 points) e) Expected return on the market (RM) is 10% and the risk-free (rr) is 4%. What must the the expected return on the portfolio according to CAPM? (Use the beta you have calculated in section d) for CAPM) (5 points) ||
Question 16 a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market…
13. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) REQUIRED RATE OF RETURN (Percent) 20.0 16.0 20 12.0 16 8.0 12 4.0 0 0 CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's betal Required rate of return on Happy Corp. stock 0 Happy Corp.'s new required rate of return is F 0.6, 7.6 HC's Stock ☐ 0.5 An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. 0 1.0 RISK (Beta) Tool tip: Mouse over the…
ed Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: Rate of Return if State Occurs Probability of State of State of Economy Recession Economy Stock I .26 .05 Stock II -.31 Normal .50 .22 .11 Irrational exuberance .24 .05 .51 The market risk premium is 5 percent, and the risk-free rate is 3 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) The standard deviation on Stock I's return is deviation on Stock II's return is es stock's systematic risk/beta, Stock percent, and the Stock I beta is The standard percent, and the Stock II beta is Therefore, based on the is "riskier".
Problem 13-27 SML (LO4) Suppose you observe the following situation: Security Pete Corp. Repete Co. Pete Corp. Repete Co. Beta 1.35 1.04 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Risk-free rate Expected Return 0.145 0.110 What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) %

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS