Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 6, Problem 2SP
(Average expected return and risk) Given the holding-period returns shown here, calculate the average returns and the standard deviations for the Kaifu Corporation and for the market.
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Students have asked these similar questions
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;)
When working with the CAPM, which of the following factors can be determined with the most precision?
a. The beta coefficient of "the market," which is the same as the beta of an average stock.
b. The beta coefficient, bi, of a relatively safe stock.
c. The market risk premium (RPM).
d. The most appropriate risk-free rate, rRF.
e. The expected rate of return on the market, rM.
Which of the following is needed to calculate a firm’s WACC?
A. the cost of carrying inventory
B. the amount of capital necessary to make the investment
C. the cost of preferred stock
D. the probability distribution of expected returns E. both b and c
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
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- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forwardThe slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; Volatilityarrow_forwardConsider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Question 1 Fill in the parts in the above table that are empty. Using the data generated in the previous question (Question 1); Plot the Security Market Line (SML) 2. Superimpose the CAPM’s required return on the SML % Return on T-Bills, Stocks, and Market Index State of the Economy Probability T- Bills Phillips Pay- up Rubber- made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP…arrow_forward
- The expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic returnarrow_forwardThe expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D.unsystematic returnarrow_forwardAn investment Analysist provide the following data regarding the possible future returns on AmDa’s common stock State of economy Probability ReturnRecession 0.25 -1.4%Normal 0.45 9.4%Boom 0.30 15.4%i. Compute the expected return on the security? ii. Compute the standard deviation on the security? iii. Compute the Coefficient of variationarrow_forward
- When working with the CAPM, which of the following factors can be determined with the most precision? a. The most appropriate risk-free rate, rRF. b. The market risk premium (RPM). c. The beta coefficient, bi, of a relatively safe stock. d. The expected rate of return on the market, rM. e. The beta coefficient of "the market," which is the same as the beta of an average stock.arrow_forwardAssume that the expected return and standard deviation of the company stock will be 17 percent, respectively. How appropriate is the sharpe ratio for these assets? When would you use the sharpe ratio?arrow_forwardi) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.arrow_forward
- What is the average return in the market (Rm)?arrow_forwardIn a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free ratearrow_forwardThe value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset’s present value. A dividend valuation model such as the following is frequently used: P = D/ K-g where: P = the current price of Common Stock D = the expected dividend K = the required rate of return on Stock g = the expected constant-growth rate of dividends for Stock a. Identify the three factors that must be estimated for any valuation model and explain why these estimates are more difficult to derive for common stocks than for bondsarrow_forward
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