PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 10PS
a.
Summary Introduction
To discuss: The safest stock for a diversified investor.
b.
Summary Introduction
To discuss: The safest stock for an undiversified investor.
c.
Summary Introduction
To compute: The beta of portfolio.
d.
Summary Introduction
To compute: The portfolio beta and standard deviation of portfolio return.
e.
Summary Introduction
To compute: The expected return of each stock.
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PART A,B and C are completed. need help in D and E. TIA
Unique vs. Market Risk. The figure below shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given besides its plot.
A. Which stock is riskiest to a diversified investor?
B. Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks?
C. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?
D. Consider a well-diversified portfolio made up of stocks with the same beta as Exxon. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20 percent.
E. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8 percent. The risk-free rate of interest is 4 percent.
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.
a. Find the beta of each stock. (Round your answers to 2 decimal places.)
Stock A
Stock D
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.)
Market Portfolio %
Stock A %
Stock D %
c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Stock A
Stock D
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Consider a portfolio consisting of the following three stocks: E The volatility of the market portfolio is 10% and it has an expected return of 8%. The risk-free rate is 3%.
a. Compute the beta and expected return of each stock.
b. Using your answer from part (a), calculate the expected return of the portfolio.
c. What is the beta of the portfolio?
d. Using your answer from part (c), calculate the expected return of the portfolio and verify that it matches your answer to part (b).
a. Compute the beta and expected return of each stock. (Round to two decimal places.)
TITLT
Data table
Portfolio Weight
(A)
Volatility
(B)
Correlation
(C)
Expected Return
(E)
%
Beta
(D)
НЕС Согр
0.28
13%
0.33
Green Widget
(Click on the following icon a in order to copy its contents into a spreadsheet.)
0.39
27%
0.61
%
Portfolio Weight
Alive And Well
0.33
14%
0.43
Volatility
13%
Correlation with the Market Portfolio
НЕС Согр
Green Widget
0.28
0.33
b. Using your answer from part (a), calculate the expected…
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?arrow_forwardFrom the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be recommend if investment in individual stock is to be made? Justify answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65 0.65arrow_forwardExpected return of a portfolio using beta. The beta of four stocks—G, H, I, and J—are 0.44, 0.75, 1.21, and 1.55, respectively and the beta of portfolio 1 is 0.99, the beta of portfolio 2 is 0.83, and the beta of portfolio 3 is 1.14. What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 3.5% (risk-free rate) and a market premium of 10.0% (slope of the line) What is the expected return of portfolio 1? (Round to two decimal places.) What is the expected return of portfolio 2? (Round to two decimal places.) What is the expected return of portfolio 3? (Round to two decimal places.)arrow_forward
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