Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Question
Chapter 10, Problem 33P
a)
Summary Introduction
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with an average risky asset in the market.
b)
Summary Introduction
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
c)
Summary Introduction
To determine: The beta of a firm.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
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Students have asked these similar questions
2. Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%.
a. Calculate the beta of firm A that goes up by 43% when the market goes up and goes down by
17% when the market goes down.
b. Calculate the beta of firm B that goes up on by 18% when the market goes down and goes
down by 10% when the market goes up.
c. Calculate the beta of a portfolio that invests 30% in firm A and 70% in firm B.
Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%.
(a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.
(b) Draw the security market line, showing the positions of stocks A and B, as well as the risk-free rate and the market portfolio on the plot. You are not required to draw the security market line to scale.
(c) Consider stock C that has an expected return of 30%, a beta of 2.3, and a standard deviation of returns of 20%. According to the CAPM, calculated in part (a) above, is stock C overpriced, underpriced, or correctly priced? What would you recommend to investors?
(d) Briefly explain the definition of market portfolio in a CAPM economy
Suppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereas stock B has a volatility of 68% and a beta of 0.75.
(a) Which stock has more total risk?
(b) Which stock has more market risk?
(c) Suppose the risk-free rate is 2% and you estimatethe market’s expected return as 10%. Which firm has a higher cost of equity capital?
Chapter 10 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 10.1 - For an investment horizon from 1926 to 2012, which...Ch. 10.1 - For an investment horizon of just one year, which...Ch. 10.2 - Prob. 1CCCh. 10.2 - Prob. 2CCCh. 10.3 - How do we estimate the average annual return of an...Ch. 10.3 - Prob. 2CCCh. 10.4 - Prob. 1CCCh. 10.4 - Do expected returns of well-diversified large...Ch. 10.4 - Do expected returns for Individual stocks appear...Ch. 10.5 - What is the difference between common risk and...
Ch. 10.5 - Prob. 2CCCh. 10.6 - Explain why the risk premium of diversifiable risk...Ch. 10.6 - Why is the risk premium of a security determined...Ch. 10.7 - What is the market portfolio?Ch. 10.7 - Define the beta of a security.Ch. 10.8 - Prob. 1CCCh. 10.8 - Prob. 2CCCh. 10 - The figure on page informalfigure shows the...Ch. 10 - Prob. 2PCh. 10 - Prob. 3PCh. 10 - Prob. 4PCh. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - The last four years of returns for a stock are as...Ch. 10 - Prob. 9PCh. 10 - Prob. 10PCh. 10 - Prob. 11PCh. 10 - How does the relationship between the average...Ch. 10 - Consider two local banks. Bank A has 100 loans...Ch. 10 - Prob. 21PCh. 10 - Prob. 22PCh. 10 - Consider an economy with two types of firms, S and...Ch. 10 - Prob. 24PCh. 10 - Explain why the risk premium of a stock does not...Ch. 10 - Prob. 26PCh. 10 - Prob. 27PCh. 10 - What is an efficient portfolio?Ch. 10 - What does the beta of a stock measure?Ch. 10 - Prob. 31PCh. 10 - Prob. 32PCh. 10 - Prob. 33PCh. 10 - Suppose the risk-free interest rate is 4%. a. i....Ch. 10 - Prob. 35PCh. 10 - Prob. 36PCh. 10 - Suppose the market risk premium is 6.5% and the...Ch. 10 - Prob. 38P
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Similar questions
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- Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.arrow_forwardSuppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 41%. Portfolios A and B are both well diversified. Portfolio Beta on M₁ Beta on M₂ Expected Return (%) A B 1.8 2.2 2.3 -0.5 31 9 What is the expected return-beta relationship in this economyarrow_forwardSuppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?arrow_forward
- Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 39% probability that the firm will have a 27 % return and a 61 % probability that the firm will have a-18% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in: a. 22 firms of type S? b. 22 firms of type I? a. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 22 firms of type S? Standard deviation is %. (Round to two decimal places.) b. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 22 firms of type I? Standard deviation is _ %. (Round to two decimal places.)arrow_forwardSuppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.arrow_forwardA firm has a beta of 0.6. If the return on the market is 9% and the risk-free return is 2%, then what is the firm's required return? a. 4.22% b. 6.20% c. 7.40% d. 2.42%arrow_forward
- (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forwardSuppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.9 2.2 33 % B 2.8 –0.22 28 % What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.)E(rP) = rf + (βP1 × RP1) + (βP2 × RP2)arrow_forwardConsider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 49% probability that the firm will have a 30% return and a 51% probability that the firm will have a - 7% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in: a. 31 firms of type S? b. 31 firms of type I?arrow_forward
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