PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 8, Problem 12PS
- a. Investors demand higher expected
rates of return on stocks with more variable rates of return. - b. The CAPM predicts that a security with a beta of 0 will offer a zero expected return.
- c. An investor who puts $10,000 in Treasury bills and $20,000 in the market portfolio will have a beta of 2.0.
- d. Investors demand higher expected rates of return from stocks with returns that are highly exposed to
macroeconomic risks.- e. Investors demand higher expected rates of return from stocks with returns that are very sensitive to fluctuations in the stock market.
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Students have asked these similar questions
Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?
a. The required return on a stock with beta = 1.0 will not change.
b. The required return on a stock with beta > 1.0 will increase.
c. The return on "the market" will increase.
d. The return on "the market" will remain constant.
e. The required return on a stock with a positive beta < 1.0 will decline.
Indicate whether the following statements are true or false.
a. Investors demand higher expected rates of return on stocks with more variable rates of return.
multiple choice 1
True
False
b. The CAPM predicts that a security with a beta of 0 will offer a zero expected return.
multiple choice 2
True
False
c. An investor who puts $10,000 in Treasury bills and $20,000 in the market portfolio will have a beta of 2.0.
multiple choice 3
True
False
d. Investors demand higher expected rates of return from stocks with returns that are highly exposed to macroeconomic risks.
multiple choice 4
True
False
e. Investors demand higher expected rates of return from stocks with returns that are very sensitive to fluctuations in the stock market.
multiple choice 5
True
False
Are the following true or false? Explain.a. Stocks with a beta of zero offer an expected rate of return of zero.b. The CAPM implies that investors require a higher return to hold highly volatile securities.c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.
Chapter 8 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM True or false? Explain or qualify as...
Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Three-factor modelThe following table shows the...Ch. 8 - Efficient portfolios Look again at the set of the...
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- 1. What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset Pricing Model (CAPM)? What about the risk premium and return on a stock with a Beta of 1? 2. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case? 3. Theoretically, returns on stocks or assets can be negatively correlated. In the real world, however, we usually encounter only positive correlations. Why may this be the case?arrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock Expected Return Standard Deviation A 12 % 4 % B 19 12 Correlation = –1 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)arrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 10% Standard Deviation 5% 9 18 Correlation = -1 Risk-free rate Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) Note: Do not round intermediate calculations. Round your answer to 3 decimal places. %arrow_forward
- 1. Risk free rate represents: a. The market rate of return b. The rate provided by long term government securities c. Beta d. The rate provided by short term government securities 2. The market risk premium is measured by: a. T-bill rate. b. market return less risk-free rate. c. beta. d. standard deviation. 3. A stock with a beta of one would be expected to have a rate of return equal to a. the market risk premium b. the risk-free rate c. the market rate of return d. zeroarrow_forwardWhat is a stock's alpha? Group of answer choices The amount you expect to earn on a security relative to some appropriate "benchmark" that appropriately reflects the risk of that investment In a CAPM world, if a stock is on the security market line, it's alpha is zero If you earn a return on security greater than the market overall, then you generated positive alpha In a CAPM world, you invest in a stock that has a Beta of 1. If you earn a return greater than the market, then you generated positive alpha In a CAPM world, you invest in a stock that has a Beta of 2. If you earn a return greater than the market, then you generated positive alphaarrow_forward1.Why will the standard deviation not be a good measure of risk when returns are negatively skewed? 2. What are the risk implications for an investor for a returns series that exhibits fat tails? 3. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss.arrow_forward
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