Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 22, Problem 7CRCT
Summary Introduction
Case summary: The coefficient market hypothesis implies that all mutual funds should obtain the same level of anticipated risk adjusted to returns. Hence, the mutual funds can be merely picked up at random.
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Hi goodmorning can you answer questions 2 this is a continuation from question one .
Question 2
Using the data generated in the previous question
a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph
Assume a utility function of ? = ?[?] − 1 ?? 2. Which statement(s) is/are correct about investors with this utility function?
[I] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher risk premium
[II] An investor with a higher degree of risk aversion chooses the optimal portfolio with lower risk
[III] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher sharpe ratio
[IV] The extent to which the investor dislikes risk is captured by ? 2
A. [II] only
B. [I], [II] only
C. [III] , [IV] only
D. [II], [IV] only
E. [I], [II], [III] only
H2.
What are the different types of expected return and related risk, for individual assets and for portfolios as a whole. Explain carefully what each type represents and give examples in each case. What type of expected returns does the CAPM model capture? What type of expected return and risk you are exposed to if you have the FTSE 100 INDEX only in the portfolio?
Chapter 22 Solutions
Fundamentals of Corporate Finance
Ch. 22.2 - Prob. 22.2ACQCh. 22.2 - Prob. 22.2BCQCh. 22.2 - Prob. 22.2CCQCh. 22.3 - What is frame dependence? How is it likely to be...Ch. 22.3 - Prob. 22.3BCQCh. 22.4 - What is the affect heuristic? How is it likely to...Ch. 22.4 - Prob. 22.4BCQCh. 22.4 - Prob. 22.4CCQCh. 22.5 - Prob. 22.5ACQCh. 22.5 - Prob. 22.5BCQ
Ch. 22.6 - Prob. 22.6ACQCh. 22.6 - Prob. 22.6BCQCh. 22 - Cognitive errors are best explained as errors in...Ch. 22 - Prob. 22.2CTFCh. 22 - Prob. 22.5CTFCh. 22 - Prob. 1CRCTCh. 22 - Prob. 2CRCTCh. 22 - Frame Dependence [LO2] How can frame dependence...Ch. 22 - Prob. 4CRCTCh. 22 - Probabilities [LO3] Suppose you are flipping a...Ch. 22 - Prob. 6CRCTCh. 22 - Prob. 7CRCTCh. 22 - Prob. 8CRCTCh. 22 - Prob. 9CRCTCh. 22 - Prob. 10CRCTCh. 22 - Your 401 (k) Account at SS Air You have been at...Ch. 22 - Your 401 (k) Account at SS Air You have been at...Ch. 22 - Prob. 3M
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- Question 2 i) Given a simple world with two assets, a bond fund and a stock fund, clearly detail the steps involved in arriving at the 1) efficient frontier, and 2) market (optimal) portfolio. ii) What is the significance of the Capital Market Line? To be more specific, what relationship does this line depict? Give a brief discussion on its application. iii) One important assumption behind portfolio theory is that investors are "meanvariance maximizers." What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier. Question 3 Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?arrow_forward1. What are the two most important inputs one needs in order to model default risk within their portfolios? (Bloomberg)arrow_forwardQ1. "No one who is risk-averse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security." Is this statement true, false, or uncertain? Explain your answer. (20)arrow_forward
- Mutual funds offer investors a.a lower return for less risk than what the investor could earn on his own. b.a lower return for more risk than what the investor could earn on his own. c.a way for individuals to eliminate the idiosyncratic risk associated with any single investment. d.a greater return for greater risk than what an investor can earn on his own.arrow_forwardWhich of the following hedge fund types is most likely to have a return that is closest to risk-free?a. A market-neutral hedge fund.b. An event-driven hedge fund.c. A long/short hedge fund.arrow_forwardQ4: What is the main disadvantage of Index Fund?arrow_forward
- QUESTION Given a simple world with two assets, a bond fund and a stock fund, clearly detail the steps involved in arriving at the 1) efficient frontier, and 2) market (optimal) portfolio. What is the significance of the Capital Market Line? To be more specific, what relationship does this line depict? Give a brief discussion on its application. One important assumption behind portfolio theory is that investors are “mean-variance maximizers.” What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.arrow_forwardA6) Finance In financial economic theory, an indifference curve shows: Select one: a. the one most desirable portfolio for a particular investor. b. the one most desirable market portfolio for all investors. c. all combinations of risk and expected return that are equally desirable to a particular investor. d. all combinations of portfolios that are equally efficient to all investors.arrow_forwardwhich one is correct? QUESTION 6 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. efficient frontier. b. utility curve. c. last frontier. d. efficient portfolio. e. capital asset pricing model.arrow_forward
- Question 5 a) “If markets are semistrong-form efficient, investors would only adopt passive investment strategies and buy into an index fund, rather than active strategies where they would have a portfolio manager select the components of their portfolios and seek for mispriced equities.” Explain if you agree with this statement, in no more than 150 words.arrow_forwardDescribe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?arrow_forward1. Which form of market efficiency is the best among weak, semi strong and strong? 2. Is stock market efficient? Give logic in favour of your answerarrow_forward
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