Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 11, Problem 37QAP
a.
Summary Introduction
Adequate information:
| Price of Stock A today (P0) | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 (P1) | 0.20 (PR) |
| Normal | $87 (P2) | 0.60 (PN) |
| Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (?A,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 18%
To compute: Which stock would be preferred by an investor, if the investor is risk-averse?
Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.
b.
Summary Introduction
Adequate information:
| Price of Stock A today (P0) | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 (P1) | 0.20 (PR) |
| Normal | $87 (P2) | 0.60 (PN) |
| Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (ρA,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 30% or 0.30
To compute: The expected return and standard deviation of the portfolio.
Introduction: Expected return simply refers to the return that is anticipated on the investment.
c.
Summary Introduction
Adequate information:
| Price of Stock A today | $75 | |
| Price of Stock A in Next Year | Probability | |
| Recession | $64 | 0.2 |
| Normal | $87 | 0.6 |
| Expanding | $97 | 0.2 |
Stock A correlation with market = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market = 0.24
Stock B correlation with Stock A = 0.36
Market standard deviation = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 30% or 0.30
To compute: Beta of the portfolio
Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.
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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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