PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 8, Problem 14PS
- a. Calculate the expected return from Johnson & Johnson.
- b. Find the highest expected return that is offered by one of these stocks.
- c. Find the lowest expected return that is offered by one of these stocks.
- d. Would U.S. Steel offer a higher or lower expected return if the interest rate were 6% rather than 2%? Assume that the expected market return stays at 9%.
- e. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%?
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Students have asked these similar questions
Dhofar Energy Services has a Beta = 1.18 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return?
Select one:
a. 0.2149
b. 0.1821
c. 0.2169
d. 1.1381
e. All the given choices are not
correct
Which 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.
Suppose the CAPM is true. Consider two
assets, X and Y, and the market M. Suppose
cov(X,M) = .3, cov(Y,M) = .5.
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(a) Is the expected return higher on X or Y?
(b) Suppose var(M) = 1.5, what are the betas
of X and Y?
(c) Suppose the expected market return is
20% and the risk free rate is 5%, what is the
expected returns of X and Y?.
(d) Given your analysis in (a)-(c), what type
of investor would prefer asset X to asset Y?
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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- Dhofar Energy Services has a Beta = 0.93 The risk - free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2193 b. 0.2634 c. 0.2039 d. 1.1753 e. All the given choices are not correctarrow_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_forwardSuppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table 12.1, and the expected return on the market is 9%. Use the betas in that table to answer the following questions. a. When you assume this higher risk-free interest rate, what makes sense for how you should modify your assumption about the rate of return on the market portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) b. Recalculate the expected return on the stocks in Table 12.1. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. Suppose now that you continued to assume that the expected return on the market remained at 9%. Now what would be the expected returns on each stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)d. Ford offer a higher or lower expected return if the interest rate is 6% rather than 3%? e. Walmart offer a higher or…arrow_forward
- Suppose you observe the following situation: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Bust 0.22 -0.12 -0.27 Normal 0.48 0.1 0.05 Boom 0.3 0.23 0.28 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?arrow_forwardAssume the Black-Scholes framework. Let S be a stock such that S(0) = 21, the dividend rate is δ = 0.02, the risk free rate is r = 0.05, and the volatility is σ = 0.2. (a) Calculate the expected payoff of a 6 month call with strike price 17. (b) Calculate the cost of such a call. (c) Calculate the cost of a 6 month put with strike price 17. (d) Calculate the price of a derivative that pays |S(0.5) − 17| in six monthsarrow_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
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