If the expected return and risk of the market portfolio are respectively 15% and 20% and the riskless rate is 2.5% use the CAPM to determine if the following stocks are mispriced: Stock Expected Return beta Portillo’s 7.5% 0.75 Redbirds Dogs 8.5% 0.90 Windy City Wieners 9.5% 1.25 If mispriced, which is (are) underpriced and which is (are) overpriced?

If the expected return and risk of the market portfolio are respectively 15% and 20% and the riskless rate is 2.5% use the CAPM to determine if the following stocks are mispriced: Stock Expected Return beta Portillo’s 7.5% 0.75 Redbirds Dogs 8.5% 0.90 Windy City Wieners 9.5% 1.25 If mispriced, which is (are) underpriced and which is (are) overpriced?

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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Compute the abnormal rates of return for the following stocks assuming the following systematic risk measures (betas): Rit = return for stock i during period t Rmt = return for the aggregate market during period t Bi = beta for stock i Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBt: ARFt: ARTt: ARct: ARET: % % % % Stock B F T C E % Rit 10.1% 9.4 13.2 11.2 15.1 Rmt 3.9% 8.5 10.0 15.6 11.2 Bi 1.00 1.10 1.45 0.65 -0.40
Stock A has a beta of 1.30, and its required return is 11.35%. Stock B's beta is 0.80. If the risk-free rate is 2.90%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 8.10% b. 6.50% c. 7.56% d. 8.45% e. 8.77%
Stock A has a beta of 0.2, and investors expect it to return 3%. Stock B has a beta of 1.8, and investors expect it to return 11%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.) Market risk Premium ______% Expected Market Rate of Return _____%
Which one of the following stocks is correctly priced if the risk-free rate of return is 3.0 percent and the market risk premium is 7.5 percent? Expected Return 8.46% Stock A B с D E 0000С Stock A O Stock D Stock C O Stock E Beta 77 1.46 1.27 1.44 .95 Stock B 12.47 11.19 13.80 8.65
(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 retum? Common Stock A Probability 0.25 0,50 0:25 Common Stock B Return 10% 17% 10% Probability 0.10 0:40 0:40 010 (Click on the soon in order to copy its contents into a spreadsheet) Return -6% 8% 15% 20% COD a. Given the information in the table the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is 4 36% (Round to two decimal places)
Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk): Stock % % % % BFT % B F T UE Rit = return for stock i during period t Rmt = return for the aggregate market during period t Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBE: ARF: ARTI: ARC: AREL: с Rit 11.5% 9.2 12.5 12.5 15.9 Rmt 4.7% 6.2 6.6 15.2 11.1
From the following information calculate Beta for stock A, required return of stock A as per CAPM and comment whether the stock is undervalued or overvalued.state that stock will lie above/below Security Market Line. Justify the answer. Expected return for the market 15% Standard deviation of the market return 25% Risk-free rate of Return 8% Correlation coefficient between stock A and the market 0.8 Standard deviation for stock A 30% Expected return for the stock 16%
Consider the following information on Stocks I and II: Probability of State of Rate of Return if State Occurs State of Economy Economy Stock I Stock II Recession Normal 0.30 8.03 -0.30 Irrational exuberance 0.30 0.40 8.37 0.31 8.14 0.47 The 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 I Stock I Beta a-2. Which stock has the most systematic risk? ○ Stock I ○ Stock Il b-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 Deviation Stock I Stock I % b-2. Which one has the most unsystematic risk? ○ Stock I ○ Stock Il c. Which stock is "riskier"? ○ Stock I ○ Stock Il
Stock XYZ has a beta of 0.50 and Stock ABC has beta of 1.00. According to CAPM, Stock XYZ has a A. higher market risk exposure than stock ABC B. lower required return than stock ABC C. lower realized return than stock ABC D. higher total risk exposure than stock ABC
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks Given the information that filloors, which investment is better based on the risk (as measured by the standard deviation) and retum? Common Stock A Probability 0,20 0.60 0:20 Return 10% 17% 20% Common Stock B Probability 0.25 0.25 0.25 0.25 (Click on the icon in order to copy its contents into a spreadsheet) Return -6% 5% 16% 23% a. Given the information in the table, the expected rate of retum for stock Ais (Round to two decimal places)
1) The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Is this stock correctly priced? (underpriced or overpriced?)
Abnormal returns, if a stock has a(Alpha)=.004, b(Beta)=1.2, A. Using the market model (eq. 7.4), find the expected percent return if the market increases by 2%. B. If the actual return is 2%, 3%, or 4%, calculate the abnormal return.

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