Video Lesson - Risk and Rates of Returnri = rRF - bx (rm – rRF)O ri = FRF + b × (rm – rrF)Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximatelyConsider Fund P, which has one third of its funds invested in each of stock A, B, and C.True or False: The beta for a fund is equal to the weighted average of the betas of the individual stocks in the fund.TrueFalseUsing your answer to the previous question, the beta for Fund P is approximatelyYou have the market risk premium, the beta for Fund P, and the risk-free rate.Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.This information implies that the required rate of return for Fund P is approximatelyTrue or False: The standard deviation for Fund P is less than 10%.O TrueO False Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated.The risk-free rate is 5.50%.StockExpected ReturnStandard DeviationBetaA7.60%10%0.6B9,70%10%1.211.80%10%1.8Let ri be the expected return of stock i, FRE represent the risk-free rate, b represent the Beta of a stock, and rM represent the market return.Assume that the market is in equilibrium, with the required rate of returns equal to expected returns.According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium?O ri = TRF +O rn = TRE +bx (rM + TRF)On = TRF - bx (rM – TRF)On = TRF + bx (rM - TRF)Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximatelyConsider Fund P, which has one third of its funds invested in each of stock A, B, and C.

Capital Asset Pricing Model: The CAPM explains the relationship between expected return and…

Let r be the expected return of stock i, rRE represent the risk-free rate, b represent the Beta of a stock, and rM represent the market return. Assume that the market is in equilibrium, with the required rate of returns equal to expected returns. According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium? On= TRF + On= TRF +bx (rM + TRF) On= TRF -bx (rM – TRF) On= TRF + bx (rm – TRF) Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock

Let r be the expected return of stock i, rRE represent the risk-free rate, b represent the Beta of a stock, and rM represent the market return. Assume that the market is in equilibrium, with the required rate of returns equal to expected returns. According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium? On= TRF + On= TRF +bx (rM + TRF) On= TRF -bx (rM – TRF) On= TRF + bx (rm – TRF) Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Compute the abnormal rates of return for the following stocks assuming the following systematic risk measures (betas): Rit = return for stock i during period t Rmt = return for the aggregate market during period t Bi = beta for stock i Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBt: ARFt: ARTt: ARct: ARET: % % % % Stock B F T C E % Rit 10.1% 9.4 13.2 11.2 15.1 Rmt 3.9% 8.5 10.0 15.6 11.2 Bi 1.00 1.10 1.45 0.65 -0.40
Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.
Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk): Stock % % % % BFT % B F T UE Rit = return for stock i during period t Rmt = return for the aggregate market during period t Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBE: ARF: ARTI: ARC: AREL: с Rit 11.5% 9.2 12.5 12.5 15.9 Rmt 4.7% 6.2 6.6 15.2 11.1
The probability distribution of returns for the two stocks X and Y are as follows: Probability 0.1 0.3 0.05 0.25 0.15 0.15 For each of the two stocks, calculate: a. The expected return. b. Variance of returns c. Volatility of returns. Stock X 0.05 -0.1 0.08 -0.08 0.20 0.12 Return Stock Y 0.13 0,04 -0.12 0.21 0.1 -0.05
The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) В В A A А (A) (B) (C)
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What is the standard deviation of each stock?
The index model has been estimated for stock A with the following results: RA = 0.01 + 1.2RM + eA. σM = 0.15; σ(eA) = 0.10. The standard deviation of the return for stock A is
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What is the covariance between each stock and the market index?
Stocks A and B have the following probability distributions of expected future returns: profitability A B 0.1 11% 27% 0.2 3 0 0.4 12 20 0.2 24 28 0.1 36 43 Calculate the expected rate of return, , for Stock B ( = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.54%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be…
Given the returns and probabilities for the three possible states listed below, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 8.10 percent and 11.60 percent, respectively. (Round answer to 4 decimal places, e.g. 0.0768.) Good OK Poor Covariance Probability 0.22 0.60 0.18 Return on Stock A 0.30 0.10 -0.25 Return on Stock B 0.50 0.10 -0.30
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has more firm-specific risk? A. Stock A B. Stock B Which stock has greater market risk? A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .092, E(RB) = 152, đA = .362, and Og = .622. %3D Calculate the expected return of a portfolio that is composed of 37 percent A and 63 percent B when the correlation between the returns on A and B is .52. (Do not a-1. round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the standard deviation of a portfolio that is composed of 37 percent A and 63 percent B when the correlation coefficient between the returns on A and B is .52. а-2. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the standard deviation of a portfolio with the same portfolio weights as in h part (a) when the correlation coefficient between the returns on A and B is -.52. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-1.…

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