Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 11, Problem 36QAP
a.
Summary Introduction
Adequate information:
Probability in bust (PBU) = 0.15
Probability in normal (PNO) = 0.60
Probability in boom (PB0) = 0.25
Expected return for stock A in Bust (R (A) BU) = -0.13
Expected return for stock A in Normal (R (A) NO) = 0.12
Expected return for stock A in Boom (R (A) BO) = 0.34
Expected return for stock B in Bust (R (B) BU) = -0.11
Expected return for stock B in Normal (R (B) NO) = 0.10
Expected return for stock B in Boom (R (B) BO) = 0.31
To compute: Expected return on each stock
Introduction: Expected return on stock refers to the return a stock likely to generate at a future date.
b.
Summary Introduction
Adequate information:
Probability in bust (PBU) = 0.15
Probability in normal (PNO) = 0.60
Probability in boom (PB0) = 0.25
Expected return for stock A in Bust (R (A) BU) = -0.13
Expected return for stock A in Normal (R (A) NO) = 0.12
Expected return for stock A in Boom (R (A) BO) = 0.34
Expected return for stock B in Bust (R (B) BU) = -0.11
Expected return for stock B in Normal (R (B) NO) = 0.10
Expected return for stock B in Boom (R (B) BO) = 0.31
To compute: The expected market risk premium when Stock A’s beta is greater than Stock B’s beta by 0.25.
Introduction: The difference between the risk-free rate and the expected return on a market portfolio is referred to as market risk premium.
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Students have asked these similar questions
The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium.
.....
True
False
What should be the risk premium and return on a stock with a Beta of zerounder the Capital Asset Pricing Model (CAPM)? What about the risk premiumand return on a stock with a Beta of 1?
Suppose you observe the following situation:
State of Economy
Probability of State of Economy
Rate of Return if State Occurs
Stock A
Stock B
Bust
0.22
-0.12
-0.27
Normal
0.48
0.1
0.05
Boom
0.3
0.23
0.28
Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?
Chapter 11 Solutions
Corporate Finance
Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQCh. 11 - Prob. 9CQCh. 11 - Prob. 10CQ
Ch. 11 - Determining Portfolio Weights What are the...Ch. 11 - Portfolio Expected Return You own a portfolio that...Ch. 11 - Prob. 3QAPCh. 11 - Portfolio Expected Return You have 10,000 to...Ch. 11 - Prob. 5QAPCh. 11 - Prob. 6QAPCh. 11 - Calculating Expected Returns A portfolio is...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Calculating Portfolio Betas You own a stock...Ch. 11 - Calculating Portfolio Betas You own a portfolio...Ch. 11 - Using CAPM A stock has a beta of 1.15, the...Ch. 11 - Prob. 13QAPCh. 11 - Prob. 14QAPCh. 11 - Prob. 15QAPCh. 11 - Using CAPM A stock has a beta of 1.08 and an...Ch. 11 - Prob. 17QAPCh. 11 - Reward-to-Risk Ratios Stock Y has a beta of 1.15...Ch. 11 - Prob. 19QAPCh. 11 - Portfolio Returns Using information from the...Ch. 11 - Prob. 21QAPCh. 11 - Prob. 22QAPCh. 11 - Analyzing a Portfolio You want to create a...Ch. 11 - Prob. 24QAPCh. 11 - Prob. 25QAPCh. 11 - Prob. 26QAPCh. 11 - Prob. 27QAPCh. 11 - Prob. 28QAPCh. 11 - Prob. 29QAPCh. 11 - Prob. 30QAPCh. 11 - Prob. 31QAPCh. 11 - Prob. 32QAPCh. 11 - Prob. 33QAPCh. 11 - Prob. 34QAPCh. 11 - Prob. 35QAPCh. 11 - Prob. 36QAPCh. 11 - Prob. 37QAPCh. 11 - Prob. 38QAPCh. 11 - Prob. 1MCCh. 11 - Prob. 2MC
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