Q1: Explain the meaning and significance of a stock's beta coefficient. Illustrate your explanation by drawing, onone graph, the characteristic lines for stocks with low, average, and high risk. (Hint: Let your three characteristiclines intersect at r_i=r_m=6%, the assumed risk-free rate.)Q2: Define the following terms, using graphs or equations to illustrate your answers where feasible.a) Risk, stand-alone risk b) Expected rate of return c) standard deviation, variance d) risk premium for stock i,market risk premium e) Capital Asset Pricing Model (CAPM)f) Expected return on a portfolio g) market risk, diversifiable risk h) Beta i) Security Market Line; SML equation j)Slope of SML and its relationship to risk aversion.Q3. Differentiate between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured, and areboth concepts relevant for investors?Q4. Can an investor eliminate market risk from a portfolio of common stocks? How many stocks must a portfoliocontain to be "reasonably well diversified"? Do all portfolios with, say, 50 stocks have about the same amount ofrisk?Q5. A stock's return for the past 3 years were 10%, -15%, and 35%. What is the historical average return? What isthe historical sample standard deviation?

Explain the meaning and significance of a stock's beta coefficient. Illustrate your explanation by drawing, on graph, the characteristic lines for stocks with low, average, and high risk. (Hint: Let your three characteristic intersect at r_ir_m=6%, the assumed risk-free rate.)

Explain the meaning and significance of a stock's beta coefficient. Illustrate your explanation by drawing, on graph, the characteristic lines for stocks with low, average, and high risk. (Hint: Let your three characteristic intersect at r_ir_m=6%, the assumed risk-free rate.)

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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Concept explainers

Classification Of Risk

Risk means when there could be a possibility that the returns expected from a particular project or investment may or may not match the investor's expectations. In other words, the uncertainty of an income arising from a source that would either be lower than expected or result in losses in risk exposure of the project. The higher the risk involved, the higher is the return expected by the investor as the investor is exposed to a high level of risk. There are various methods by which different types of risk can be assessed and avoided or mitigated.

Question

Q1: Explain the meaning and significance of a stock's beta coefficient. Illustrate your explanation by drawing, on
one graph, the characteristic lines for stocks with low, average, and high risk. (Hint: Let your three characteristic
lines intersect at r_i=r_m=6%, the assumed risk-free rate.)
Q2: Define the following terms, using graphs or equations to illustrate your answers where feasible.
a) Risk, stand-alone risk b) Expected rate of return c) standard deviation, variance d) risk premium for stock i,
market risk premium e) Capital Asset Pricing Model (CAPM)
f) Expected return on a portfolio g) market risk, diversifiable risk h) Beta i) Security Market Line; SML equation j)
Slope of SML and its relationship to risk aversion.
Q3. Differentiate between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured, and are
both concepts relevant for investors?
Q4. Can an investor eliminate market risk from a portfolio of common stocks? How many stocks must a portfolio
contain to be "reasonably well diversified"? Do all portfolios with, say, 50 stocks have about the same amount of
risk?
Q5. A stock's return for the past 3 years were 10%, -15%, and 35%. What is the historical average return? What is
the historical sample standard deviation?

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