Foundations Of Financial Management
17th Edition
ISBN: 9781260013917
Author: BLOCK, Stanley B., HIRT, Geoffrey A., Danielsen, Bartley R.
Publisher: Mcgraw-hill Education,
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Chapter 1, Problem 13DQ
Assume you are looking at many companies with equal risk. Which ones will have the highest stock prices? (LO1-3)
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Consider the below graph:
E(R₁)
E(RM)
R₁
stocks
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stocks
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What is the slope of the graph? If the historical return of an individual stock is lying the
slope then the stock is undervalued or overvalued?
a) Discuss why international stock might have high volatility but low betas.
Q2) Consider the below graph:
E(R₁)
Ans:
E(RM)
R₁
stocks
M
O
stocks
O
What is the slope of the graph? If the historical return of an individual stock is lying the
slope then the stock is undervalued or overvalued?
Ans: Slope of the Graph is called=
B
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Foundations Of Financial Management
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- 1. Calculate the Expected Return, Standard Deviation, and Beta for each stock. 2. Which stock has more systematic risk and which one has more unsystematic risk? Which stock is "riskier"? Explain your answer completely. Use excel to show formulas and calculationsarrow_forwardSuppose S $96, K = $100, u = 1.03, d = 0.97, and R = 1.02. The risk-neutral probability, q, that the stock price will increase is: O -0.8000 O 0.1667 1.2000 O 0.8333arrow_forwardQ1: 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…arrow_forward
- Q3) Consider the following two companies and their forecasted returns for the upcoming year: (picture) A. What is the standard deviation of the returns on each company's stock (Company A, and B) (write all formulas). B. Of these two stocks, which is riskier? Justify your answerarrow_forward1. A stock with a beta of zero would be expected to have a rate of return equal to a. the risk-free rate b. the market risk premium c. zero d. the market rate of return 2. If an individual stock's beta is higher than 1.0, that stock is: a. riskier than the market. b. always the most attractive to investors. c. less risky than the market. d. exactly as risky as the market. 3. If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why is the firm's cost of debt lower? a. Market interest rates have increased. b. Additional debt can be issued more cheaply than the original debt. c. Interest is deductible for tax purposes. d. There should be no difference; cost of debt is the same as the bonds' market yield.arrow_forwardAssume you know the expected and required rate of returns of the following stocks. Explainwhich of the following stocks are undervalued, overvalued and fairly valued. Stock Expected rate of return Required rate of return Evaluation X 10 12 ? Y 6 5 ? Z 4 4 ?arrow_forward
- 12. • A researcher obtained the following results for a stock price: Pt = 0,999Pt-1 + εt with R2=0,99 and εt is white noise. According to the above estimation, is the market for the specific stock efficient?arrow_forwardSuppose that three stocks (A, B, and C} and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1)A1 + (0.8)A2 E(RB) = (0.7)A1 + (0.6)A2 E(RC) = (0.3)A1 + (0.4)A2 a. If A1 = 4 percent and A2 = 2 percent, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year. b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale. Problems 13 and 14 refer to the data contained in Exhibit 7.23, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). {Note: You may find it…arrow_forwardWhich of the following will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreasesarrow_forward
- The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstancesarrow_forward2. Suppose that three stocks (A, B, and C) and two common systematic risk factors (1 and 2) have the following relationship: E(RA) = (0.80) F1 + (0.90) F2 E(RB)= (-0.20) F1 + (1.30) F2 E(RC)= (1.80) F1 + (0.50) F2 a. Compute the expected returns if F1 = 4% and F2 = 5% b. Assuming that all three stocks are currently priced at $35 and will not pay a dividend over the next year, compute the expected prices a year from now c. Now, suppose you "know" that in one year the actual prices of stocks A, B, and C will be $37.20, $37.80, and $38.50. How can you best take advantage of what you consider to be a market mispricing? d. How will the current prices adjust?arrow_forwardwhich one is correct? QUESTION 6 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. efficient frontier. b. utility curve. c. last frontier. d. efficient portfolio. e. capital asset pricing model.arrow_forward
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