Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 13, Problem 13QP
Using
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risk-free rate have to be if they are correctly priced? (See Problems 19 and 20.)
11.4
CAPM Suppose the risk-free rate is 8 percent. The expected return on the market is
14 percent. If a particular stock has a beta of .60, what is its expected return based
on the CAPM? If another stock has an expected return of 20 percent, what must its
beta be? (See Problem 13.)
[FIN220]
Assuming that the CAPM approach is appropriate, compute the required rate of return for each of the following stocks, given a risk-free rate of 0.07 and an expected return for the market portfolio of 0.13:
Stock
A
B
C
D
E
Stock Beta
1.4
1.2
1
0.6
0.9
Using CAPM [LO4] A stock has a beta of 1.35 and an expected return of
16 percent. A risk free asset currently earns 4.8 percent.
a. What is the expected return on a portfolio that is equally invested in the two
assets?
b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 8 percent, what is its
beta?
d. If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights
How do you interpret the weights for the two assets in this case? Explain.
Chapter 13 Solutions
Fundamentals of Corporate Finance
Ch. 13.1 - How do we calculate the expected return on a...Ch. 13.1 - In words, how do we calculate the variance of the...Ch. 13.2 - What is a portfolio weight?Ch. 13.2 - How do we calculate the expected return on a...Ch. 13.2 - Is there a simple relationship between the...Ch. 13.3 - What are the two basic parts of a return?Ch. 13.3 - Under what conditions will a companys announcement...Ch. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQCh. 13.5 - What happens to the standard deviation of return...
Ch. 13.5 - What is the principle of diversification?Ch. 13.5 - Why is some risk diversifiable? Why is some risk...Ch. 13.5 - Why cant systematic risk be diversified away?Ch. 13.6 - Prob. 13.6ACQCh. 13.6 - What does a beta coefficient measure?Ch. 13.6 - True or false: The expected return on a risky...Ch. 13.6 - How do you calculate a portfolio beta?Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - What is the security market line? Why must all...Ch. 13.7 - Prob. 13.7CCQCh. 13.8 - If an investment has a positive NPV, would it plot...Ch. 13.8 - What is meant by the term cost of capital?Ch. 13 - Prob. 13.1CTFCh. 13 - Prob. 13.5CTFCh. 13 - Beta is a measure of what?Ch. 13 - The slope of the security market line is equal to...Ch. 13 - Where would a negative net present value project...Ch. 13 - Prob. 1CRCTCh. 13 - Prob. 2CRCTCh. 13 - Systematic versus Unsystematic Risk [LO3] Classify...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Indicate...Ch. 13 - Prob. 5CRCTCh. 13 - Diversification [LO2] True or false: The most...Ch. 13 - Portfolio Risk [LO2] If a portfolio has a positive...Ch. 13 - Beta and CAPM[LO4] Is it possible that a risky...Ch. 13 - Corporate Downsizing [LO1] In recent years, it has...Ch. 13 - Earnings and Stock Returns [LO1] As indicated by a...Ch. 13 - Determining Portfolio Weights [LO1] What are the...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Prob. 4QPCh. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Calculating Returns and Standard Deviations [LO1]...Ch. 13 - Calculating Expected Returns [LO1] A portfolio is...Ch. 13 - Returns and Variances [LO1] Consider the following...Ch. 13 - Returns and Standard Deviations [LO1] Consider the...Ch. 13 - Calculating Portfolio Betas [LO4] You own a stock...Ch. 13 - Calculating Portfolio Betas [LO4] You own a...Ch. 13 - Using CAPM[LO4] A stock has a beta of 1.15, the...Ch. 13 - Using CAPM[LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using the SML[LO4] Asset W has an expected return...Ch. 13 - Reward-to-Risk Ratios [LO4] Stock Y has a beta of...Ch. 13 - Reward-to-Risk Ratios [LO4] In the previous...Ch. 13 - Using CAPM [LO4] A stock has a beta of 1.14 and an...Ch. 13 - Portfolio Returns [LO2] Using information from the...Ch. 13 - Prob. 22QPCh. 13 - Portfolio Returns and Deviations [LO2] Consider...Ch. 13 - Analyzing a Portfolio [LO2, 4] You want to create...Ch. 13 - Analyzing a Portfolio [LO2, 4] You have 100,000 to...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Consider...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - Prob. 1MCh. 13 - Beta is often estimated by linear regression. A...Ch. 13 - Prob. 3MCh. 13 - Prob. 4MCh. 13 - Prob. 5M
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- c. A stock has an expected return of 15 percent, its beta is 0.9, and the risk-free rate is 6 percent. What must the expected return on the market be?arrow_forward16. Using CAPM [LO4] A stock has an expected return of 11.85 percent, its beta is 1.24, and the expected return on the market is 10.2 percent. What must the risk-free rate be?arrow_forwardYou're analyzing a stock that has a beta of 1.65. If the risk free rate of return is .04 and market risk premium is .15, what is the required rate of return for this stock?arrow_forward
- and the risk-free rate is 2.8 percent. market be? 7 16. Using CAPM A stock has an expected return of 10.2 percent and a beta of 91, and the expected return on the market is 10.8 percent. What must the risk-free rate be? return of 11.4arrow_forwardReward-to-Risk Ratios [LO4] Stock Y has a beta of 1.3 and an expected return of 18.5 percent. Stock Z has a beta of 0.7 and an expected return of 12.1 percent. If the risk-free rate is 8 percent and the market risk premium is 7.5 percent, are these stocks correctly priced? Reward-to-Risk Ratios [LO4] In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?arrow_forwardHi I also need help with this one as well 1. A stock has a beta of 1.25, the expected return on the market is 14 percent, and the risk-free rate is 5.2 percent. What must the expected return on this stock be? 2. A stock has an expected return of 13 percent, the risk-free rate is 4.5 percent, and the market risk premium is 7 percent. What must the beta of this stock be? 3. A stock has an expected return of 10 percent, its beta is .70, and the risk-free rate is 5.5 percent. What must the expected return on the market be? 4. A stock has an expected return of 15 percent, its beta is 1.45, and the expected return on the market is 12 percent. What must be risk-free rate be?arrow_forward
- Q6-Suppose that the rate of return on investment- free has risk %8 and the expected return rate for the market %14. If the particular stock his given B = 0.60 - What is the expected return rate based on CAPM? -How much the Beta of another stock that has required return 0.20 ?arrow_forwardA2) The risk-free rate of return is 2.8 percent, the inflation rate is 3.1 percent, and the market risk premium is 5.9 percent. What is the expected rate of return on a stock with a beta of 0.58?arrow_forwardNow assume that the stock is currently selling at $30.29. What is its expected rate of return?arrow_forward
- AA Corporations stock has a beta of 0.8. The risk-free rate is 4%, and the expected return on the market is 12%. What is the required rate of return on AAs stock?arrow_forwardYou have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forward*Stock A has a beta of 1.3 and an expected return of 10.2. Stock B has a beta of 0.8 and an expected return of 8.7. If these stocks are priced correctly according to the CAPM, what is the risk-free rate? Give your answer in percentage to the nearest basis point.arrow_forward
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