PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 11PS
Measuring risk* The following table shows estimates of the risk of two well-known Canadian stocks:
- a. What proportion of each stock’s risk was market risk, and what proportion was specific risk?
- b. What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
- c. What is the confidence interval on Loblaw’s beta? (See page 234 for a definition of “confidence interval.”)
- d. If the
CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 5% and an expected market return of 12%. - e. Suppose that next year, the market provides a 20% return. Knowing this, what return would you expect from Sun Life?
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Exercises:
a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between
the returns of A and B is 0.006. The correlation of returns between A and B is:
b. Explain the differences between systemic risk and unsystematic risk, give additional examples
c. Compare and contrast the Capital Market Line and Security Market Line
d.
The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of
the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the
correlation coefficient of the returns of the stock and the returns of the market?
e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the
risk-free rate is 7% and the expected market rate of return is 14%
When working with the CAPM, which of the following factors can be determined with the most precision?
a. The beta coefficient of "the market," which is the same as the beta of an average stock.
b. The beta coefficient, bi, of a relatively safe stock.
c. The market risk premium (RPM).
d. The most appropriate risk-free rate, rRF.
e. The expected rate of return on the market, rM.
When working with the CAPM, which of the following factors can be determined with the most precision?
a. The most appropriate risk-free rate, rRF.
b. The market risk premium (RPM).
c. The beta coefficient, bi, of a relatively safe stock.
d. The expected rate of return on the market, rM.
e. The beta coefficient of "the market," which is the same as the beta of an average stock.
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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