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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Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM )is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%,and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%,and -10%, respectively. Compute the beta and expected return of portfolio 2.
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. 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)
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.0% 5.0% 2 0.5 20 32 15 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A : Beta D: b. What is the expected rate of return on each stock? (Round your answers to 2 decimal places.) % Rate of Return on A: % Rate of Return on B:
Assume CAPM holds. What is the correlation between an efficient portfolio and market portfolio? a. 1 b.-1 c.0 d. Not enough information Assume CAPM holds. The risk-free rate is 1% and the expected return on the portfolio is 5%. What is the expected return of a stock with a beta of 2? 70%
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?
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) c. A pure play energy stock with high exposure to the energy factor (b=2) but zero exposure to the other two factors
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 an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?
Consider the following expectations for the market and two stocks in two possible equallylikely states:State Market Return Stock A Stock BBoom 25% 38% 12%Recession 5% -2% 6% Quesiton: Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a β of 2 and Stock B has a β of 0.3.

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