Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 10PS
The market price of a security is $40. Its expected
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The market price of a security is $90. Its expected rate of return is 12%. The risk-free rate is 6% and the market risk premium is 9.6%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Chapter 7 Solutions
Essentials Of Investments
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...
Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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- The market price of a security is $27. Its expected rate of return is 13.1%. The risk-free rate is 5%, and the market risk premium is 9.1%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity (round answer to 2 decimal places).arrow_forwardThe market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium is 8.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity.arrow_forwardAssume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?arrow_forward
- the risk free rate is 3% and the market premium rM rRF is 4%. stock A has a beta of 1.2, and stock B has a beta of 0.8. what is the required rate of return on each stock? assume that investors become less willing to take risk (i.e, they become more risk averse), so the market risk premium rises from 4% to 6%. Assume that the risk free rate remains constant. what effect will this have on the required rates of return on the two stocks?arrow_forwardThe following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%. Security N O P Return 20 21 23 Beta 1.2 1.8 0.82 Calculate the market risk premium, and the expected return of each asset using CAPM.arrow_forwardSuppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model: a. What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places.) b. What would be the expected rate of return on a stock with β = 0? (Round your answer to 2 decimal places.) c. Suppose you consider buying a share of stock at $47. The stock is expected to pay $3.5 dividends next year and you expect it to sell then for $49. The stock risk has been evaluated at β = –.5. Is the stock overpriced or underpriced? A. Underpriced B. Overpricedarrow_forward
- a) Suppose the risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results b)Stock 1 has a standard deviation of return of 6%. Stock 2 has a standard deviation of return of 2%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question b) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of…arrow_forwardSuppose the market premium is 12%, market volatility is 20% and the risk-free rate is 6%. Suppose a security has a beta of 0.8. Using the CAPM, what is its expected return? (Round off the final answer to one decimal place. Example of writing your answer 2.5%)arrow_forwardSuppose the CAPM holds. You know that the average investor has a degree risk aversion of 3.3. The current risk free rate is 0.012, the inflation is estimated 0.017, and the volatility of the market is 0.17. What is the market risk premium? [*.000]arrow_forward
- a) Suppose the risk-free rate is 7% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations b) explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model.arrow_forward8. Suppose security X achieves 20% return with half chance and -10% return with half chance. (a) What is the expected return of X? What is the risk (return volatility) of X? (b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?arrow_forwardUsing the CAPM theory, if the Volatility of a stock is twice as great as the market, the market return on stocks in general (using the S&P 500 as a proxy) is 12 %, and treasury bills are yielding 2%, what is the return that investors in that security can expect? C r = Rf + beta x (Km - Rf) where r is the expected (required) return rate on a security (based on how risky it is); Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class (Market Return) Beta measures the volatility of the security, relative to the asset class. 12% 16% 22% Capital Assets Pricing Model 20%arrow_forward
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