Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
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
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Textbook Question
Chapter 12, Problem 4QP
Multifactor Models Suppose stock returns can be explained by the following three-factor model:
Ri = RF + β1F1 + β2F2 – β3F3
Assume there is no firm-specific risk. The information for each stock is presented here:
The risk premiums for the factors are 4.9 percent 3.8 percent and 5.3 percent, respectively. If you create a portfolio with 20 percent invested in Stock A, 20 percent invested in Stock 8, and the remainder in Stock C, what is the expression for the return on your portfolio? If the risk-free rate is 3.2 percent, what is the expected return on your portfolio?
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Question:
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A to beta of B.
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Risk Premium
Factor
Industrial production (I)
Interest rates (R)
Consumer confidence (C)
Required:
8%
4
7
The return on a particular stock is generated according to the following equation:
r = 17% +0.9/+0.5R+0.70 C+ e
a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%.
Note: Do not round intermediate calculations. Round your answer to 1 decimal place.
a-2. Is the stock over- or underpriced?
a-1. Equilibrium rate of return
a-2 Is the stock over- or underpriced?
%
Suppose we have the following information:
Securit Amount Invested Expected Return Beta Stock
A RM1 ,OOO 8% 0.80
Stock B RM2,OOO 12% 0.95
Stock C RM3,OOO 15% 1.10
Stock D RM4,OOO 18%
a) Compute the expected return on this portfolio.
b) Calculate the beta of the portfolio.
c) Does this portfolio have more or less systematic risk than an average asset? Explain.
Chapter 12 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 12 - Prob. 1CQCh. 12 - Prob. 2CQCh. 12 - Prob. 3CQCh. 12 - Prob. 4CQCh. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQCh. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ
Ch. 12 - Prob. 1QPCh. 12 - Factor Models Suppose a three-factor model is...Ch. 12 - Prob. 3QPCh. 12 - Multifactor Models Suppose stock returns can be...Ch. 12 - Prob. 5QPCh. 12 - Market Model The following three stocks are...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - APT Assume that the following market model...Ch. 12 - Prob. 10QP
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