Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Concept explainers
Question
Suppose rRF = 6%, rM = 10%, and bi = 1.8.
- What is ri, the required
rate of return on Stock i? Round your answer to one decimal place.
%
- 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri?
- Both rM and ri will remain the same.
- Both rM and ri will increase by 1 percentage point.
- rM will remain the same and ri will increase by 1 percentage point.
- rM will increase by 1 percentage point and ri will remain the same.
- Both rM and ri will decrease by 1 percentage point.
2. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri?
- Both rM and ri will remain the same.
- Both rM and ri will decrease by 1 percentage point.
- rM will decrease by 1 percentage point and ri will remain the same.
- rM will remain the same and ri will decrease by 1 percentage point.
- Both rM and ri will increase by 1 percentage point.
- 1. Now assume that rRF remains at 6%, but rM increases to 11%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.
The new ri will be %.
2. Now assume that rRF remains at 6%, but rM falls to 9%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.
The new ri will be %.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 4 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose 5%, TH 13%, and b₁ = 1.9. a. What is n, the required rate of return on Stock I? Round your answer to one decimal place. % b. 1. Now suppose mr increases to 6%. The slope of the SML remains constant. How would this affect and n? 1. Both г and will increase by 1 percentage point. II. г will remain the same and n will increase by 1 percentage point. III. will increase by 1 percentage point and n will remain the same. IV. Both г and n will decrease by 1 percentage point. -Select- V. Both г and will remain the same. 2. Now suppose гRF decreases to 4%. The slope of the SML remains constant. How would this affect and n? I. Both and will decrease by 1 percentage point. II. г will decrease by 1 percentage point and r, will remain the same. III. г will remain the same and r will decrease by 1 percentage point. IV. Both г and n will increase by 1 percentage point. -Select- V. Both г and will remain the same. c. 1. Now assume that RF remains at 5%, but г increases to 14%. The slope of the…arrow_forward9) Firm X and Y each have a beta of 1.5 and 2.5. If their expected return (cost of equity) is each estimated to be 7% and 10% under CAPM, what is the assumed expected market return and risk-free rate?arrow_forwardThe market consensus is that Analog Electronic Corporation has an ROE = 14%, a beta of 1.85, and plans to maintain indefinitely its traditional plowback ratio of 3/4. This year's earnings were $3.10 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 15%, and T-bills currently offer a 6% return. a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Leading Trailing P/E Ratioarrow_forward
- Indicate whether the following statements are true or false (circle one). Use 1 or 2 sentences to discuss why it is so. (a) If R, is simple 1-month return, then the annualized return is 12 x R, after assuming all R = R. True False Why? (b) Let and r GSA be continuously compounded 1 - month returns for Goldman Sachs Group (GS) and American International Group (AIG). If we construct a portfolio using the share ain[0, 1] for GS, the portfolio cc return is ľ AIG = 0x*y +(1-x)*r True False Why? (c) In 5. (b)., if 5% quantile of the portfolio cc return is given as AIG, GS, r 40.05 = -0.5, then 5% monthly Value-at-Risk for the $10,000 investment in this portfolio is $10,000 × (-0.5) = -$ 5,000. True False rarrow_forwardConsider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3 and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt. Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4, and that the interest rate is r = 0.0. The initial stock price is So = 1. (a) Compute the price process (i.e. prices at all times and states) for a European Put option on the stock with strike price K = 1 and maturity T = 3. (x - ž) (b) Compute the price at time t = 0 of the Australian option K with ST K = 1. Note: As this option is path dependent, you will not be able to use the recursive method, nor will you be able to use the CRR formula.arrow_forwardSuppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 5%, and all stocks have independent firm- specific components with a standard deviation of 48%. Portfolios A and B are both well diversified. Portfolio A B Beta on M₁ 1.6 2.2 Beta on M₂ 2.3 -0.6 Required: What is the expected return-beta relationship in this economy? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(rp) = Expected Return (%) 38 8 Answer is complete but not entirely correct. Bp1 + 5.00 % 4.43 11.26 Bp2arrow_forward
- A researcher has determined that a two-factor model is appropriate to determine the return on a share. The factors are the percentage change in GNP and an interest rate. GNP market return is expected to grow by 13.5 percent and interest rate is expected to be 12.9 percent. A share has a beta of 1.2 on the GNP and -0.8 on the interest rate. If the risk-free rate is 11 percent, calculate the required rate of return on the share using APT. (b)arrow_forwardIf D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for thecoming year?arrow_forwardIf D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the comingyear?arrow_forward
- Find the total value TV of the given income stream and also find its present value PV (at the beginning of the given interval) using the given interest rate. (Round your answers to the nearest cent.) R(t) = 40,000 + 1,000t, 0 ≤ t ≤ 10, at 5% TV = $ PV = $arrow_forwardGiven the following information, calculate the expected value for Firm C's EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and σA = $3.63; E(EPSB) = $4.20, and σB = $2.94. Do not round intermediate calculations. Round your answer to the nearest cent. Probability 0.1 0.2 0.4 0.2 0.1 Firm A: EPSA ($1.61) $1.80 $5.10 $8.40 $11.81 Firm B: EPSB (1.20) 1.30 4.20 7.10 9.60 Firm C: EPSC (2.59) 1.35 5.10 8.85 12.79 E(EPSC): $ You are given that σc = $4.12. Discuss the relative riskiness of the three firms' earnings using their respective coefficients of variation. Do not round intermediate calculations. Round your answers to two decimal places. CV A B C The most risky firm is .arrow_forwardSuppose rRF = 4%, rM = 11%, and bi = 1.5. What is ri, the required rate of return on Stock i? Round your answer to two decimal places. % 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will decrease by 1%. Both rM and ri will remain the same. Both rM and ri will increase by 1%. rM will remain the same and ri will increase by 1%. rM will increase by 1% and ri will remain the same.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education