PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 7, Problem 22PS
Stock betas There are few, if any, real companies with negative betas. But suppose you found one with β = –.25.
- a. How would you expect this stock’s
rate of return to change if the overall market rose by an extra 59%? What if the market fell by an extra 5%?
You have $1 million invested in a well-diversified portfolio of stocks. Now you receive an additional $20,000 bequest. Which of the following actions will yield the safest overall portfolio return?
- i. Invest $20,000 in Treasury bills (which have β = 0).
- ii. Invest $20,000 in stocks with β = 1.
- iii. Invest $20,000 in the stock with β = –.25.
Explain your answer.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You hear on the news that the S&P 500 was down 1.7% today relative to the risk-free rate (the market's excess return was - 1.7%). You are thinking about your
portfolio and your investments in Hewlett Packard and Proctor and Gamble.
a. If Hewlett Packard's beta is 1.2, what is your best guess as to Hewlett Packard's excess return today?
b. If Proctor and Gamble's beta is 0.5, what is your best guess as to P&G's excess return today?
2. You are considering a stock A that pays a dividend of $1. The beta coefficient of A is 1.3. The risk free return is 6%, while the market average return is 13%.
a. What is the required return for Stock A?
b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?
3. Lawrence Industries’ most recent annual dividend was $1.80 per share (D0$1.80), and the firm’s required return is 11%. Find the market value of Lawrence’s shares when:
a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant annual growth rate in years 4 to infinity.
b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant annual growth rate in years 4 to infinity.
c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10% constant annual growth rate in years 4 to infinity.
You hear on the news that the S&P 500 was down 1.6% today relative to the risk-free rate (the market's excess return
was -1.6%). You are thinking about your portfolio and your investments in Hewlett Packard and Proctor and Gamble.
a. If Hewlett Packard's beta is 1.3, what is your best guess as to Hewlett Packard's excess return today?
b. If Proctor and Gamble's beta is 0.5, what is your best guess as to P&G's excess return today?
a. If Hewlett Packard's beta is 1.3, what is your best guess as to Hewlett Packard's excess return today?
Hewlett Packard's excess return today is %. (Round to one decimal place.)
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You hear on the news that the S&P 500 was down 2.1% today relative to the risk-free rate (the market's excess return was -2.1%). You are thinking about your portfolio and your investments in Hewlett Packard and Proctor and Gamble. a. If Hewlett Packard's beta is 1.1, what is your best guess as to Hewlett Packard's excess return today? b. If Proctor and Gamble's beta is 0.4, what is your best guess as to P&G's excess return today? KIDE a. If Hewlett Packard's beta is 1.1, what is your best guess as to Hewlett Packard's excess return today? Hewlett Packard's excess return today is %. (Round to one decimal place.)arrow_forwardYou hear on the news that the S&P 500 was down 2.5% today relative to the risk-free rate (the market's excess return was -2.5%). You are thinking about your portfolio and your investments in Hewlett Packard and Proctor and Gamble. a. If Hewlett Packard's beta is 1.2, what is your best guess as to Hewlett Packard's excess return today? b. If Proctor and Gamble's beta is 0.5, what is your best guess as to Proctor and Gamble's excess return today? a. If Hewlett Packard's beta is 1.2, what is your best guess as to Hewlett Packard's excess return today? Hewlett Packard's excess return today is %. (Round to one decimal place.)arrow_forward← You are thinking of buying a stock priced at $109.31 per share. Assume that the risk-free rate is about 4.03% and the market risk premium is 6.48%. If you think the stock will rise to $118.76 per share by the end of the year, at which time it will pay a $3.48 dividend, what beta would it need to have for this expectation to be consistent with the CAPM? The beta is (Round to two decimal places.) ...arrow_forward
- You hear on the news that the S&P 500 was down 2.9% today relative to the risk-free rate (the market's excess return was - 2.9%). You are thinking about your portfolio and your investments in Hewlett Packard and Proctor and Gamble. a. If Hewlett Packard's beta is 1.1, what is your best guess as to Hewlett Packard's excess return today? b. If Proctor and Gamble's beta is 0.4, what is your best guess as to P&G's excess return today? a. If Hewlett Packard's beta is 1.1, what is your best guess as to Hewlett Packard's excess return today? Hewlett Packard's excess return today is __ % ? (Round to one decimal place.) b. If Proctor and Gamble's beta is 0.4, what is your best guess as to P&G's excess return today? Proctor and Gamble's excess return today __ % ? (Round to one decimal place.)arrow_forwardSuppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:a. What is the expected rate of return on the market portfolio?b. What would be the expected rate of return on a stock with β = 0?c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = −.5. Is the stock overpriced or underpriced?arrow_forwardAs an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUT = 1.8. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to one decimal place. % Now suppose rRF increases to 6%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will remain the same.II. Both rM and rUT will increase by 1 percentage point.III. rM will remain the same and rUT will increase by 1 percentage point.IV. rM will increase by 1 percentage point and rUT will remain the same.V. Both rM and rUT will decrease by 1 percentage point. Now suppose rRF decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will increase by 1 percentage point.II. Both rM and rUT will remain the same.III. Both rM and rUT will decrease by 1 percentage point.IV. rM will decrease…arrow_forward
- You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CFO estimates the Beta as 0.90. Management wants to use the 30 year bond rate as the risk free rate, arguing that Investors should make long term investments; that rate is 3% today. The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies. The CFO asks that you use an expected return of 9% for the average stock. The market risk Premium (RPM) will be 6%. 9% minus 3% = 6%. Calculate the cost of equity (Rs) using the CAPM. The formula is Rs = rRF + (RPM ) x β. Rs is the required return on equity or the Cost of Equity, rRF is the risk free rate, RP M is the required stock market return in excess of the risk free rate, and β , (Beta) is the stocks relative risk. β is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio. The Discounted Cash Flow model is…arrow_forwardA firm's common stock has just paid a $3.00 dividend (Do), which is expected to grow at a constant rate of 6.0 percent each year. The beta of this stock is 1.30, the risk-free rate is 4.0 percent, and the expected return on the market is 10.0 percent. Determine how much you should be willing to pay (the intrinsic value) for this stock today. Assume that CAPM is the correct model for required returns. 536.55 $54.83 $63.97 $73:10 545.69arrow_forwardSuppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereasstock B has a volatility of 68% and a beta of 0.75.(a) Which stock has more total risk?(b) Which stock has more market risk?(c) Suppose the risk-free rate is 2% and you estimate the market’s expected return as10%. Which firm has a higher cost of equity capitalarrow_forward
- Choose one appropriate statement. 1. The movement of stock prices have certain patterns, and investors can make profits by studying such patterns. 2. If a hedge fund manager believes that Toyota will going to outperform Honda she will short stocks of both companies. 3. When one share of Apple stock is being traded at $150, the stock market believes that you can always sell a share of Apple stock for at least $150 in the future. 4. O An undervalued stock should outperform the market in the long run. 5. O Diversification is not appropriate because it would prevent investors from capitalizing on the superior return that can result from a concentrated holding of the stock of one successful company.arrow_forwardJersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually. What is the required return for JJM? Given the required return, what is the value of the stock? If the stock is selling for $100, what should you do? If the beta coefficient declines to 1.0, what is the new value of the stock? If the price remains $100, what course of action should you take given the valuation in d? Could you write the answers in an equation form so i can understand what or how the formulas workarrow_forwardYou have been asked to calculate the required return for a stock that you are considering investing in. You recently looked up the risk-free rate (as measured by Treasury bonds) and found it to be 1%. You also looked up the current market return of the S&P 500 and found it to be 12. If the firm has a beta of 1.2, what is its required return?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY