EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 8, Problem 14P
Summary Introduction
To determine: The probability that an investor in Company T will earn a return less than required
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Give typing answer with explanation and conclusion
The return on the Tarheel Corporation stock is expected to be 14 percent with a standard deviation of 9 percent. The beta of Tarheel is 0.9. The risk-free rate is 6 percent, and the expected return on the market portfolio is 16 percent. What is the probability that an investor in Tarheel will earn a rate of return less than the required rate of return? Assume that returns are normally distributed. Use Table V to answer the question. Round z value in intermediate calculation to two decimal places. Round your answer to the nearest whole number.
Stock X has a beta of 1.15 and an expected return of 11.1 percent. Stock Y has a beta of 1.2 and an expected return of 11.5 percent. What is the risk - free rate of return
assuming that both stock X and stock Y are correctly priced?
Suppose the market risk premium is 9 % and also that the standard deviation of returns on the market portfolio is 0.26 . Further assume that the correlation between the returns on ABX (Barrick Gold) stock and returns on the market portfolio is 0.62 , while the standard deviation of returns on ABX stock is 0.36 . Finally assume that the risk-free rate is 2 %. Under the CAPM, what is the expected return on ABX stock? (write this number as a decimal and not as a percentage, e.g. 0.11 not 11%. Round your answer to three decimal places. For example 1.23450 or 1.23463 will be rounded to 1.235 while 1.23448 will be rounded to 1.234)
Chapter 8 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 8 - Prob. 1QTDCh. 8 - Prob. 2QTDCh. 8 - Prob. 3QTDCh. 8 - Prob. 4QTDCh. 8 - Prob. 5QTDCh. 8 - Prob. 6QTDCh. 8 - Prob. 7QTDCh. 8 - Prob. 8QTDCh. 8 - Prob. 9QTDCh. 8 - Prob. 10QTD
Ch. 8 - Prob. 11QTDCh. 8 - Prob. 12QTDCh. 8 - Prob. 13QTDCh. 8 - Prob. 14QTDCh. 8 - Prob. 15QTDCh. 8 - Prob. 16QTDCh. 8 - Prob. 17QTDCh. 8 - Prob. 18QTDCh. 8 - Prob. 19QTDCh. 8 - Prob. 20QTDCh. 8 - Prob. 21QTDCh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 12PCh. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 21PCh. 8 - Prob. 22PCh. 8 - Prob. 23PCh. 8 - Prob. 24PCh. 8 - Prob. 25PCh. 8 - Prob. 26PCh. 8 - Prob. 27PCh. 8 - Prob. 28P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forwardWhich of the following statements is CORRECT? (Assume that the risk-free rate is a constant.) a. The effect of a change in the market risk premium depends on the slope of the yield curve. b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the level of the risk-free rate. e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.arrow_forwardThe risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is the required rate of return on the stock, E(Ri)? Use the CAPM equation.arrow_forward
- (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.arrow_forwardStock A has a beta coefficient = 1.12. calculate the expected rate of return of the stock A given that the risk-free rate is 0.36 and the annual return is 0.12. give your answer in 0.000.arrow_forwardAssume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT? 1. b. The expected return on the investor’s portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%. 2. d. The investor’s risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%. 3. e. Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%. 4. a. The expected return on the investor’s portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%. 5.…arrow_forward
- Suppose risk-free rate of return = 2%, market return = 7%, and Stock B’s return = 11%. a. Calculate Stock B’s beta. b. If Stock B’s beta were 0.80, what would be its new rate of return?arrow_forwardA stock has an expected return of 12.7 percent and a beta of 1.18, and the expected return on the market is 11.7 percent. What must the risk-free rate be?arrow_forwardAssume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) = ???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)arrow_forward
- Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…arrow_forward*Stock A has a beta of 1.3 and an expected return of 10.2. Stock B has a beta of 0.8 and an expected return of 8.7. If these stocks are priced correctly according to the CAPM, what is the risk-free rate? Give your answer in percentage to the nearest basis point.arrow_forwardStock A has a beta of 0.2, and investors expect it to return 3%. Stock B has a beta of 1.8, and investors expect it to return 11%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.) Market risk Premium ______% Expected Market Rate of Return _____%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY