Question
In: Finance
Problem 9-9 Consider the following table, which gives a security analyst’s expected return on two stocks...
Problem 9-9
Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market:
| Market Return | Aggressive Stock | Defensive Stock | |||
| 5 | % | –3 | % | 3 | % |
| 27 | 34 | 11 | |||
a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 5% or 27%? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm’s stock if the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 3%.
Solutions
Expert Solution
IN CASE OF HURDLE RATE, IT IS NOT MENTIONED, BETA SHOULD BE TAKEN TILL WHAT DECIMALS, SO I HAVE PRESENTED 2 ANSWERS : WITH 2 DECIMAL AND WITH 4 DECIMAL. THANK YOU
jeff jeffy answered 1 year agoRelated Solutions
Consider the following table, which gives a security analyst’s expected return on two stocks in two...
Consider the following table, which gives a security analyst’s
expected return on two stocks in two particular scenarios for the
rate of return on the market:
Market Return
Aggressive Stock
Defensive Stock
5
%
–3
%
4
%
24
36
9
a. What are the betas of the two stocks?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Agressive stock:
Defensive stock
b. What is the expected rate of return on each
stock if the two...
Consider the following table, which gives a security analyst’s expected return on two stocks in two...
Consider the following table, which gives a security analyst’s
expected return on two stocks in two particular scenarios for the
rate of return on the market:
Market Return
Aggressive Stock
Defensive Stock
6
%
–4
%
3
%
21
34
9
a. What are the betas of the two stocks?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Beta
Aggressive stock
Defensive stock
b. What is the expected rate of return on each
stock if the...
Consider the following table, which gives a security analyst’s expected return on two stocks in two...
Consider the following table, which gives a security analyst’s
expected return on two stocks in two particular scenarios for the
rate of return on the market:
Market Return
Aggressive Stock
Defensive Stock
6
%
–4
%
3
%
21
34
9
a. What are the betas of the two stocks?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Beta
Aggressive Stock
Defensive Stock
b. What is the expected rate of return on each
stock if the...
Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market.
Consider the following table, which gives a
security analyst’s expected return on two stocks in two particular
scenarios for the rate of return on the market. Assume that both
scenarios are equally likely to happen (i.e., probability of
scenario 1 = probability of scenario 2=0.5).ScenariosMarket ReturnAggressive StockDefensive Stock15%−2%6%225 %38%12%What are the betas of the two stocks? Plot the two securities on the SML graph. Assume that T-bill
rate is 6%. What are the alphas of each?
Problem 1. Consider the following table, which gives a security analysts expected return on two stocks...
Problem 1. Consider the following table, which
gives a security analysts expected return on two stocks for two
particular market returns:
States
Market Return
Aggressive Stock
Defensive Stock
Bad
Good
5%
25%
-2%
38%
6%
12%
a) What are the betas of the two stocks?
b) What is the expected rate of return on each stock if the
market return is equally likely to be 5% or 25%?
c) If the T-bill rate is 6% and the market return is...
Consider the following table, which gives a security analyst's expected return on two stocks for two...
Consider the following table, which gives a security analyst's
expected return on two stocks for two particular market
returns:
Market Return
Aggressive Stock
Defensive Stock
6.76
%
3.76
%
2.01
%
21.26
30.51
13.76
Required:
(a)
What are the betas of the two stocks? (Round your
answers to 2 decimal places.)
Beta A
Beta D
(b)
What is the expected rate of return on each stock if the market
return is equally likely to be 6.76% or...
Consider the following table, which gives a security analyst's expected return on two stocks In two particular scenarios for the rate of return on the market:
Problem 9-9 Consider the following table, which gives a security analyst's expected return on two stocks In two particular scenarios for the rate of return on the market: Market Return Aggressive Stock Defensive Stock 7% -4% 4%253513Aggressive Stock Market Return 7% Defensive Stock -4% 25 13 a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 7% or 25%? e. What hurdle rate...
Consider stocks of two companies A and B, the table below gives their expected returns and...
Consider stocks of two companies A and B, the table below gives
their expected returns and standard deviation Expected return for
Stock A 10% Expected return for Stock B 25% Standard deviation for
Stock A 12% Standard deviation for Stock B 30% Plot the risk and
expected return of portfolio of these two stocks for the following
correlation coefficient : -1.0,-0.5,0.0,0.5,1.0
Problem 24-9 Consider the two (excess return) index-model regression results for stocks A and B. The...
Problem 24-9
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 5%, and the market’s average return was 15%. Performance
is measured using an index model regression on excess returns.
Stock
A
Stock
B
Index model regression
estimates
1% +
1.2(rM ? rf)
2% +
0.8(rM ? rf)
R-square
0.617
0.457
Residual standard deviation,
?(e)
11%
19.8%
Standard deviation of excess
returns
22.3%
26.3%
a. Calculate the following statistics...
Consider the following two, completely separate, economies. The expected return and volatility of all stocks in...
Consider the following two, completely separate, economies. The
expected return and volatility of all stocks in both economies is
the same. In the first economy, all stocks move together – in good
times all prices rise together and in bad times they all fall
together. In the second economy, stock returns are independent –
one stock increasing in price has no effect on the prices of other
stocks. Assuming you are risk-averse, and you could choose one of
the two...
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