Consider the following Information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 14% 0.8 9.30% 10.35 12.10 14 14 1.1 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (x-x)? Round your answer to one decimal place. b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. d. What would you expect the standard deviation of Fund P to be? -Select I. Less than 14% II. Greater than 14% III. Equal to 14%

Consider the following Information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 14% 0.8 9.30% 10.35 12.10 14 14 1.1 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (x-x)? Round your answer to one decimal place. b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. d. What would you expect the standard deviation of Fund P to be? -Select I. Less than 14% II. Greater than 14% III. Equal to 14%

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 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:
Stock Y has a beta of 1.4 and an expected return of 15.1 percent. Stock Z has a beta of .7 and an expected return of 8.6 percent. If the risk-free rate is 5 percent and the market risk premium is 6.5 percent, the reward-to-risk ratios for Stocks Y and Z are the SML reward-to-risk is percent, Stock Y is and percent, respectively. Since and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Now it's time for you to practice what you've learned. Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated. The risk-free rate is 3.50%. Stock Expected Return A B C 8.30% 10.70% 13.10% Standard Deviation Beta 1.2 20% 20% 20% The beta for Fund P is approximately 1.8 2.4 Let 7; be the expected return of stock i, TRP represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return. Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. You have the market risk premium, the beta for Fund P, and the risk-free rate. Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. This information implies that the required rate of return for Fund P is…
The returns on each of the three stocks are positively correlated, but they are not perfectly correlated. Expected Standard Stock Return Deviation Beta Stock A 10% 20% 1.0 Stock B 10 20 1.0 Stock C 12 20 1.4 The risk-free rate is 5%. The required returns equal expected returns. What is the market risk premium? а. 4.0% b. 4.5% C. 5.0% d. 5.5% A stock has an expected return of 12% percent. The beta of the stock is 1.2 and the risk-free rate is 7%. What is the market risk premium? а. 2.50% b. 3.50% С. 4.17% d. 5.33% Calculate the beta of the stock that has a required rate of return of 14%. The risk-free rate of return is 5% and that the market risk premium is 7%. а. 1.25 b. 1.29 С. 1.50 d. 1.83
We know that two stocks A and B are correctly priced by the CAPM model. For A, the expected return is 12%, and the beta is 1.5; for B, the expected return is 6%, and the beta is 0.5. Based on this information, what is the risk free rate and expected market return? Select one: A. 3%; 9% B. 3%; 6% C. 2%; 8% D. 4%; 10%
Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Standard Deviation Stock Expected Return A 8.88% B с X 10.82 12.76 THATH 14% 14 14 Beta 0.8 1.2 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. 1.6 Open spreadsheet a. What is the market risk premium (H-AF)? Round your answer to two decimal places. b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two…
Question
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta 16% 0.8 B 16 1.2 с 8.50 16 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 4.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (re-ra)? Round your answer to one decimal place. b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. % d. What would you expect the standard deviation of Fund P to be? 1. Less than 16% II. Greater than 16% III. Equal to 16% -Select- 6.50% 7.50
We have the following information on Stocks A and B. The risk-free rate is 5%, and the market risk premium is 7.5%. Assume that the market portfolio is correctly priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced, underpriced, or correctly priced? Stock A Stock B Expected return 1196 16.25% Beta 0.8 1.5
1. Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .8 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are ____ and ____ percent, respectively. Since the SML reward-to-risk is ____ percent, Stock Y is ____(undervalued/ overvalued) and Stock Z is ____(undervalued/ overvalued).
Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom.13.02.32.50 Normal.55.10.22.20 Bust .32.16.21.35 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio's expected return, the variance, and the standard deviation? Note: Do not round intermediate calculations. Round your variance answer to 5 decimal places, e.g., 16161. Enter your other answers as a percent rounded to 2 decimal places, e. g., 32.16. If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.
3. Consider two perfectly correlated stocks A and B. The standard deviation of return on stock A is 10% and that of stock B is 15%. The standard deviation of the return of a portfolio that invests equally in stocks A and B is generally A. equal to 12.5% D. greater than 14% B. smaller than 12.5% C. greater than 12.5%

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