Consider the following information on Stocks I and II:Probability of State ofRate of Return if State OccursState of EconomyEconomyStock IStock IIRecessionNormal0.308.03-0.30Irrationalexuberance0.300.408.370.318.140.47The market risk premium is 8 percent and the risk-free rate is 40.5 percent.a-1. What is the beta of each stock?Note: Do not round Intermediate calculations. Round your answers to 2 decimal places.Stock IStock IBetaa-2. Which stock has the most systematic risk?○ Stock I○ Stock Ilb-1. What is the standard deviation of each stock?Note: Do not round Intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.Standard DeviationStock IStock I%b-2. Which one has the most unsystematic risk?○ Stock I○ Stock Ilc. Which stock is "riskier"?○ Stock I○ Stock Il

Stock Risk Analysisa-1. Beta Calculation:Stock I:Expected Return (ER) on Stock I = (Probability of…

Answered: Consider the following information on…

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

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Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
1. 1- Calculate the beta adjusted by the degree of freedom for stock X relative to the equity market using the information from the table (performance): A B 0.82 1.22 42.07 Year 1 2 3 4 5 6 7 None of the options is true X -7 -11 21 15 8 9 -2 Market 7 15 20 17 10 7 -1
None
What is the required return for each stock? What is required return for stock B? Scenario Probability Stock A Stock B Market Risk-free rate Bust 0.25 -0.15 -0.05 Normal 0.55 0.2 0.1 Boom 0.2 0.4 0.3 Beta 1.2 0.9 Expected return 0.13 0.05
U Assume CAPM holds. We know expected return and beta of two stocks: Stock A: E[ra] = 10% and beta_a = 1.5 Stock B: E[rb] = 5% and beta_b = 0.5 What would be the expected return of a stock that has a beta of 0.9? O 6.5% Ⓒ7% O 7.5% O 6% Question 5 Which of the following statements is false? o The CAPM follows from equilibrium conditions in a frictionless mean-variance economy with rational investors According to CAPM, everyone should hold a mix of the market portfolio and the risk-free asset. According to CAPM, everyone can generate positive return by buying positive alpha stocks and by selling negative alpha stocks. According to CAPM, the expected return on a stock is a linear function of its beta.
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 Stock Il .25 .06 -.30 Normal .45 .18 .06 Irrational exuberance .30 .12 .45 The market risk premium is 8 percent, and the risk-free rate is 6 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 stock's systematic risk/beta, Stock percent, and the Stock I beta is percent, and the Stock II beta is . The standar Therefore, based on the is "riskier".
Give the return of the stock in which you would most likely invest and show the preferred order of the stocks if you were considering further investment, all other things being equal. Stock Beta Risk-Free Market-Rate CA-K 0.95 5.5% 9% AU-L 1.05 6% 8.5% TT-M 1.10 5% 8%
Consider the following stock return scenarios for three stocks: Stock Stock A B Economy Up Average Down 8% 5% 0% 2% 3% 4% Stock с 12% 0% -5% If each state of the economy is equally likely, calculate the expected return and population standard deviation for a portfolio invested entirely in Stock A. Which stock should be added to the portfolio to reduce risk?
Consider the three stocks in the following table. P(t) represents price at time t, and Q(t) represents shares outstanding at time t. Stock C splits two-for-one in the last period. What is the rate of return for the price-weighted index that is formed using Stocks A, B, and C from time period 1 to time period 2? B C zero P(1) 95 45 100 -20.83% 20.83% None of the above Q(1) 100 200 200 P(2) 95 45 50 Q(2) 100 200 400
A stock’s return has the following distribution: Demand for the company’s products Probability of this demand occurring Rate of Return if this demand occurs Weak 0.1 (0.5) Below Average 0.2 (0.05) Average 0.4 0.16 Above Average 0.2 0.25 Strong 0.1 0.60 Use statistical measures to calculate the risk and return of the stock.
Suppose your expectations regarding the stock price are as follows: HPR (including dividends) State of the Market Boom Normal growth Recession Probability Ending Price 0.35 0.30 0.35 Mean Standard deviation Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) – E(r)]² to compute the mean and standard deviation of the HPR S S on stocks. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. do do $ 140 110 80 % 44.5% 14.0 -16.5 %
Consider the following simplified APT model: Factor Market Expected Risk Premium (%) Interest rate Yield spread 6.2 -0.8 4.8 Factor Risk Exposures Market ( Interest Rate ( Yield Spread ( Stock b₁ ) P 1.0 p2 1.0 p3 0.3 b2 ) -1.4 0 2.1 b3 ) -0.6 0.1 0.6 = : 3.8%. Calculate the expected return for each of the stocks shown in the table above. Assume rf Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Expected return P 7.80% Expected return P2 10.38% Expected return P3 %

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