Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 25P
a)
Summary Introduction
To determine: The expected return.
Introduction:
Expected return refers to a return that the investors expect on a risky investment in the future.
b)
Summary Introduction
To determine: The volatility of the portfolio.
Introduction:
Standard deviation refers to the deviation of the actual returns from the expected returns.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider two types of assets: market portfolio (M) and stock A.
The expected return is 8% and standard deviation of the market portfolio is 15%. The risk-free rate is 2%. The standard deviation of market portfolio returns is 15%. The standard deviation of stock A is 30%, and the beta coefficient is 1.
Draw the capital market line and show the position of stock A.
Suppose 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.
b) You are given the following information about Stock X and the market:
The annual effective risk-frec rate is 5%.
The expected return and volatility for Stock X and the market are shown in the table
below:
Expected Return
Volatility
Stock X
5%
40%
Market
8%
25%
The correlation between the returns of stock X and the market is -0.25.
Assume the Capital Asset Pricing Model holds.
Calculate the required return for Stock X and determine if the investor should invest
in Stock X.
Chapter 11 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 11.1 - What is a portfolio weight?Ch. 11.1 - How do we calculate the return on a portfolio?Ch. 11.2 - What does the correlation measure?Ch. 11.2 - How does the correlation between the stocks in a...Ch. 11.3 - Prob. 1CCCh. 11.3 - Prob. 2CCCh. 11.4 - Prob. 1CCCh. 11.4 - Prob. 2CCCh. 11.4 - Prob. 3CCCh. 11.5 - What do we know about the Sharpe ratio of the...
Ch. 11.5 - If investors are holding optimal portfolios, how...Ch. 11.6 - When will a new investment improve the Sharpe...Ch. 11.6 - Prob. 2CCCh. 11.7 - Prob. 1CCCh. 11.7 - Prob. 2CCCh. 11.8 - Prob. 1CCCh. 11.8 - According to the CAPM, how can we determine a...Ch. 11 - You are considering how to invest part of your...Ch. 11 - You own three stocks: 600 shares of Apple...Ch. 11 - Consider a world that only consists of the three...Ch. 11 - There are two ways to calculate the expected...Ch. 11 - Using the data in the following table, estimate...Ch. 11 - Use the data in Problem 5, consider a portfolio...Ch. 11 - Using your estimates from Problem 5, calculate the...Ch. 11 - Prob. 8PCh. 11 - Suppose two stocks have a correlation of 1. If the...Ch. 11 - Arbor Systems and Gencore stocks both have a...Ch. 11 - Prob. 11PCh. 11 - Suppose Avon and Nova stocks have volatilities of...Ch. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 16PCh. 11 - What is the volatility (standard deviation) of an...Ch. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Suppose Ford Motor stock has an expected return of...Ch. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - A hedge fund has created a portfolio using just...Ch. 11 - Consider the portfolio in Problem 27. Suppose the...Ch. 11 - Prob. 29PCh. 11 - Prob. 30PCh. 11 - You have 10,000 to invest. You decide to invest...Ch. 11 - Prob. 32PCh. 11 - Prob. 33PCh. 11 - Prob. 34PCh. 11 - Prob. 35PCh. 11 - Prob. 36PCh. 11 - Assume all investors want to hold a portfolio...Ch. 11 - In addition to risk-free securities, you are...Ch. 11 - You have noticed a market investment opportunity...Ch. 11 - Prob. 40PCh. 11 - When the CAPM correctly prices risk, the market...Ch. 11 - Prob. 45PCh. 11 - Your investment portfolio consists of 15,000...Ch. 11 - Suppose you group all the stocks in the world into...Ch. 11 - Prob. 48PCh. 11 - Consider a portfolio consisting of the following...Ch. 11 - Prob. 50PCh. 11 - What is the risk premium of a zero-beta stock?...
Knowledge Booster
Similar questions
- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…arrow_forwardIf a given stock in the portfolio had established 1.23 beta; the related expected return is at 11.7percent, and 3.5percent is the current earning of a risk-free asset; a. Determine the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.7, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 9%, what is its beta? d. If a portfolio of the two assets has a beta of 2.46, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Discuss.arrow_forwardAssume that the risk-free and rate is 5.50% and the market risk premium is 7.75%. What is the expected return for the overall stock market (rm)?arrow_forward
- Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…arrow_forwardc) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). (10 marks)d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (10 marks)(Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)arrow_forwardAssume for parts (a) to (h) that the Capital Asset Pricing Model holds. The marketportfolio has an expected return of 5%. Stock A’s return has a market beta of 1.5, anexpected value of 7% and a standard deviation of 10%. Stock B’s return has amarket beta of 0.5 and a standard deviation of 20%. The correlation between stockA’s and stock B’s return is 0.5.Required:a) Explain the term ‘capital asset pricing model.’b) What is the risk-free rate?c) What is the expected return on stock B?d) Draw a graph with expected return on the y-axis and beta on the x-axis. Indicate the approximate position of the risk-free asset, the market portfolio and stocks A and B on this graph. Draw the line, which connects these four points.e) Explain the term ‘Securities Market Line’, and what is the slope of the SML for this economy?f) Consider a portfolio with a weight of 50% in stock A and 50% in stock B. What are its variance and expected return?g) Where would under-priced and over-priced securities plot on…arrow_forward
- a. Determine Stock X's beta coefficient. b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise, assume that the market return is equal to the NYSE's average return. Using the information calculated, what is the assumed risk-free rate in the CAPM equation? Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)arrow_forwardAssume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.arrow_forwardAssume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A(A) to beta of B(B).arrow_forward
- The data on the expected return of 2 stocks (M and C) along with the economic conditions and their probabilities is attached below Questions : Calculate the expected return for asset M and asset C. Calculate the standard deviation for asset M and asset C. c) If asset M is a market portfolio, while the beta (β) for asset C is 1.25 and the risk-free asset is 6%. What is the required rate of return for asset C according to the CAPM method ?. .arrow_forwardUsing the data in the following table, LOADING... , consider a portfolio that maintains a 75% weight on stock A and a 25% weight on stock B. a. What is the return each year of this portfolio? b. Based on your results from part (a), compute the average return and volatility of the portfolio. c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9. d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks. Question content area bottom Part 1 a. What is the return each year of this portfolio? Enter the return of this portfolio for each year in the table below: (Round to two decimal places.) Year 2010 2011 2012 2013 2014 2015 Portfolio enter your response here% enter your response here% enter your response…arrow_forward(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.35 0.30 0.35 Return 13% 14% 18% Common Stock B Return - 6% 7% 16% 20% Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning