Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 7, Problem 35C
Suppose the market can be described by the following three sources of systematic risk. Each factor in the following table has a mean value of zero (so factor values represent realized surprises relative to prior expectations), and the risk premiums associated with
each source of systematic risk are given in the last, column.
Systematic Factor Risk Premium Industrial roduction. IP 6% Interest rates. INT 2 Credit risk, CRF 4
The excess return, R, on a particular stock is described by the following equation that relates realized returns to surprises in the three systematic factors:
R = 6% + IMIP +.5 INT +.75 CRFD +e
Find the equilibrium expected excess return on this stock using the APT. Is the stock overpriced or underpriced? (LO 7-3)
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The additional return over the risk-free rate needed to compensate investors for assuming an
average amount of risk.
a.
Market Risk Premium
b.
Risk-free rate
С.
Stock's beta
O d.
Security Market Line
e.
Required Return on Stock
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor
Risk Premium
Industrial production (I)
8
%
Interest rates (R)
4
%
Consumer confidence (C)
6
%
The return on a particular stock is generated according to the following equation:
r = 16% + 1.6I + 0.8R + 1.30C + e
a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)
a-2. Is the stock over- or underpriced?
E(FAssume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found
to be half of the required return (Rs) on stock B. The risk-free rate (R;) is one-fourth of the required
return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (BA) to beta of B
(BB).
a o
Chapter 7 Solutions
Essentials Of Investments
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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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