d. Compute the portfolio return and portfolio risk if the Stock A and Stock B are combined equallyin a portfolio.19. Consider the three factor APT modelFactorRisk PremiumChange in GNP5%Change in energy prices-1Change in long-term interest rates+2Calculate the expected rate of return on the following stocks. The risk free interest rate is 7%a. A stock whose return is uncorrelated with all three factorsb. A stock with average exposure to each factor (i.e., with b = 1 for each)c. A pure play energy stock with high exposure to the energy factor (b-2) but zero exposure tothe other two factors/20. Maroc Group of Companies (MGC) Ltd is considering an investment in an equipment costingGHC80,000. The equipment would attract a 25% annual written down allowance. The operating cash1lows are expected to be as follows:YearGHC30,000240,0003.20,000The investment would also require additional working capital of GHC25,000 in the year of investmentwhich will be recovered at the end of the project. The project is expected to have a useful life of three yearsafter which the investment would be scrapped at a value of GHC50,000. The rate of tax on profits is 30%.The company's cost of capital is 8%. As a financial manager of MGC:a) Estimate the cost of capital for MGCb) Assess the viability of the investment using the Net Present Value (NPV) approachc) Determine the Modified Internal Rate of Return (MIRR)

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are combined equally 19. Consider the three factor APT model Factor Risk Premium Change in GNP 5% Change in energy prices -1 Change in long-term interest rates +2 Calculate the expected rate of return on the following stocks. The risk free interest rate is 7% a. A stock whose return is uncorrelated with all three factors b. A stock with average exposure to each factor (i.e., with b = 1 for each) A pure play

are combined equally 19. Consider the three factor APT model Factor Risk Premium Change in GNP 5% Change in energy prices -1 Change in long-term interest rates +2 Calculate the expected rate of return on the following stocks. The risk free interest rate is 7% a. A stock whose return is uncorrelated with all three factors b. A stock with average exposure to each factor (i.e., with b = 1 for each) A pure play

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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Similar questions

Give typing answer with explanation and conclusion the expected return on stock A is 11.35%. the expected return on stock B is 8.7%. assuming CAPM holds, if the beta of stock A is higher than the beta of stock B by 0.17, what should the risk premium be?
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 8% 9 7 Factor Inflation Industrial production Oil prices Factor Beta 1.1 0.6 0.3 a. If T-bills currently offer a 7% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) X Answer is complete but not entirely correct. Expected rate of return 19.0 X %
Assume the Black-Scholes framework. You are given: i. S(t) is the stock price at time t. ii. The stock's volatility is 25%. iii. The continuously compounded expected rate of return is 8%. iv. The stock pays dividends continuously at a rate of 3% proportional to its price. v. The continuously compounded risk-free interest rate is 4%. vi. The current stock price is S (0) 125. Calculate Pr (S (4) > 150 S (2) - 120). Possible Answers A. 0.30 0.40 C 0.65 D. 0.70 0.85
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
2. Based on the following information calculate the expected return and standard deviation for the two stocks: State of economy Probability of state of economy Rate of return if state occur Stock A Stock B -.17 .12 .29 Recession Normal Boom 3. How should the price of a stock change when it goes ex-dividend? 4. Suppose stock in Gamma Air Freight has a beta of 1.25. the market risk premium is 7% and the risk free rate is 6%. Alpha's last dividend was $2 per share and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $30. What is Gamma's cost of equity capital? .05 .65 .30 .05 .08 .13
1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%
1. The following table presents the expected returns of three stocks and the risk free rate. в 4% Stock A 8% Expected return What is the expected return and risk on an equally weighted portfolio composed of these four assets? The standard deviation of stock A is 10% and the covariance between A and B equals 0.0045. The correlation matrix between A, B and C is: 14% 4% Correl B A 1 0.3 0.7 B 0.3 0.5 0.5 Combining stocks A and C in a portfolio in equal proportions will result in a variance of 1.95%. 0.7
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information: Stock A Beta 1.33 Expected Return 12% Stock B Beta 0.7 Expected Return 10% (a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words] (b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively. (please show me steps and round the final answer to 2 decimal places, thanks)
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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?
You expect the risk-free rate to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. Current Expected Expected Stock Beta Price Price Dividend U 1.5 $10 $11.50 $1.00 N 1.1 $27 $30 $0.00 Ο 0.8 $35 $36 $1.50 (Question 2 of 2) What is the required rate of return (based on the CAPM) for an equally weighted portfolio of the three stocks? (Enter your answer as a percentage, i.e., "10.25" for 10.25 percent
1. If a stock has a(Alpha)=0.002, b(Beta)=1.4, Using the market model (eq. 7.4), find the expected percent return for the above stock if the market return is expected to be 2% and the risk free rate is 1%. 2. Assume stock prices follow a random walk and a particular stock has had the following recent stock prices: Day 1: 129.5 Day 2: 126.9 Day 3: 127.1 what is the best estimate of day 4 prices?

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