PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 5PS
Risk Premium Suppose that in year 2030, investors become much more willing than before to bear risk. As a result, they require a return of 8% to invest in common stocks rather than the 10% that they had required in the past. This shift in risk aversion causes a 15% change in the value of the market portfolio.
- a. Do stock prices rise by 15% or fall?
- b. If you now use past returns to estimate the expected risk premium, will the inclusion of data for 2030 cause you to underestimate or overestimate the return that investors required in the past?
- c. Will the inclusion of data for 2030 cause you to underestimate or overestimate the return that investors require in the future?
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Consider a three-factor APT model. The factors and associated risk premiums are:
Factor
Risk Premium (%)
Change in gross national product (GNP)
+6.9
Change in energy prices
0.4
Change in long-term interest rates
+2.6
Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.8%.
A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.)
A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.)
A pure-play energy stock with high exposure to the energy factor (b = 1.9) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.)
An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.9 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices…
. Suppose your expectations regarding the stock price are as follows:
Selling price = 100 T-bills = 6% dividend = 10 per 100 value
State of market
Probability
Ending price
Вoom
0.3
140
Normal growth
0.4
110
Recession
80
0.3
Calculate the HPR for each scenario, the expected rate of return, and the risk premium
on your investment, and standard deviation of excess return.
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) + 6.5 Change in energy prices 0.5 Change in long-term interest rates +2.9 Calculate expected rates of return on the following stocks. The risk - free interest rate is 6.8%. A stock whose return is uncorrelated with all three factors
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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