Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 10, Problem 3CQ
Risk and Return We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their investments entirely in bonds. Are such investors irrational?
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We have seen that over long periods, stock investments have tended to substantially outperform bond investments. However, it is common to observe investors with long horizons holding portfolios composed entirely of bonds. Are such investors irrational?
How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes by the nickname “fixed income”?
Which of these statements below are correct?
(a) Small arbitrage opportunities may occasionally exist in real markets due to lack of information.
(b) If there is an arbitrage opportunity, it means one can make a risk-free profit.
(c) Arbitrary investments and arbitrage generating investments are basically the same
(d) The no-arbitrage price of a bond is equal to its present value.
(e)The law of one price is based on the no-arbitrage assumption.
Chapter 10 Solutions
Corporate Finance
Ch. 10 - Investment Selection Given that Madrigal...Ch. 10 - Investment Selection Given that Sears was down by...Ch. 10 - Risk and Return We have seen that over long...Ch. 10 - Prob. 4CQCh. 10 - Effects of Inflation Look at Table 10.1 and Figure...Ch. 10 - Risk Premiums Is it possible for the risk premium...Ch. 10 - Prob. 7CQCh. 10 - Returns Two years ago, the Lake Minerals and Small...Ch. 10 - Prob. 9CQCh. 10 - Historical Returns The historical asset class...
Ch. 10 - Prob. 1QAPCh. 10 - Calculating Yields In Problem 1, what was the...Ch. 10 - Calculating Returns Rework Problems 1 and 2...Ch. 10 - Prob. 4QAPCh. 10 - Prob. 5QAPCh. 10 - Prob. 6QAPCh. 10 - Prob. 7QAPCh. 10 - Prob. 8QAPCh. 10 - Prob. 9QAPCh. 10 - Calculating Real Returns and Risk Premiums In...Ch. 10 - Prob. 11QAPCh. 10 - Prob. 12QAPCh. 10 - Prob. 13QAPCh. 10 - Prob. 14QAPCh. 10 - Calculating Returns You bought a stock three...Ch. 10 - Prob. 16QAPCh. 10 - Prob. 17QAPCh. 10 - Prob. 18QAPCh. 10 - Prob. 19QAPCh. 10 - Prob. 20QAPCh. 10 - Prob. 21QAPCh. 10 - Prob. 22QAPCh. 10 - Prob. 23QAPCh. 10 - Using Return Distributions Suppose the returns on...Ch. 10 - Prob. 25QAPCh. 10 - Prob. 26QAPCh. 10 - Using Probability Distributions Suppose the...Ch. 10 - Prob. 28QAPCh. 10 - Prob. 1MCCh. 10 - Prob. 2MCCh. 10 - Assume you decide you should invest at least part...Ch. 10 - Prob. 4MCCh. 10 - Prob. 5MCCh. 10 - What portfolio allocation would you choose? Why?...
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- Given that higher-risk investments, such as small-company stocks, have outperformed other investments over time, why don’t all investors choose to invest only in these high-risk securities? (Answer the question correctly and in-depth.)arrow_forwardSelect all the correct statements. a. The no-arbitrage price of a bond is equal to its present value. b. If there is an arbitrage opportunity, it means one can make a risk-free profit. c. Small arbitrage opportunities may occasionally exist in real markets due to lack of information. d. The law of one price is based on the no-arbitrage assumption. e. Arbitrary investments and arbitrage generating investments are basically the samearrow_forwardWhich one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.arrow_forward
- The CAPM implies that investors require a higher return to hold highly volatile securities. Is this true or false? Provide a brief discussion.arrow_forwardWhich of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.arrow_forwardFor the holder of a fixed-rate coupon bond, reinvestment risk is a bigger problem during a period of falling interest rates than during a period of rising interest rates. Why, Explain.arrow_forward
- As an investor, how well do you think you could handle thevolatility of the stock market, knowing that the value of your investments could dropdramatically from time to timearrow_forwardWhen prevailing market rates decline over the time an investor owns a bond, there is often an opportunity to receive a capital gain on the sale of the bond. True Falsearrow_forwardOne often finds that a company’s bonds have a higher yield than its preferred stock, eventhough an investor considers the bonds to be less risky than the preferred. What causes thisyield differential?arrow_forward
- b. Assume tḥat you maintain bonds and money market securities in your portfolio and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not share the same view), while short term interest rates will remain the same. i. How would you rebalance your portfolio between bonds and money market securities?arrow_forwardShort-term interest rates are more volatile than long-term interest rates. Despite this, rates of return on long-term bonds are more volatile than rates of return on short-term securities. How can these two empirical observations be reconciled?arrow_forwardWhy should stock market investors ignore specific risks when calculating required rates of return? There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.arrow_forward
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