Homework Answers
Option (D) is correct.
It is the systematic risk when fluctuations are due to market wide news representing common risk. This is the risk for every industry or company. It cannot be avoided. It can be reduced by proper planning of hedging.
On the other hand unsystematic risk is the risk of the particular industry, company, market segment or product. Unsystematic risk can be avoided by diversification,.
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fluctuations of a stock’s return that are due
Fluctuations of a stock's return that are due...
Required return on Stock = Risk-free return + (Market risk premium)(Stock's beta) to compensate the investor...
Required return on Stock = Risk-free return + (Market risk premium)(Stock's beta) to compensate the investor for risk. If a stock's expected return plots below the SM If a stock's expected return plots on or above the SML, then the stock's return is -Select- the stock's return is -Select- to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up...
vto compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insuffici...
vto compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk. If a stock's expected return plots on or above the SML, then the stock's return is sufficient The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then...
Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about StocksI and II: Rate...
Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about StocksI and II: Rate of Return If State Occurs State of Economy Stock II Probability of State of Economy .25 .45 .30 Stock .06 21 - 29 Recession Normal Irrational exuberance .09 .15 49 The market risk premium is 8 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a...
Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with...
Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected return and risk values calculated for each of the assets are shown in the following table, B a. If the returns of assets V and W are perfectly positively correlated correlation coefficient = +1), describe the range of (1) expected return and (2)...
A stock has a required return of 9%, the risk-free rate is 3.5%, and the market risk premium is 4%. What is the stock's...
A stock has a required return of 9%, the risk-free rate is 3.5%, and the market risk premium is 4%. What is the stock's beta? Round your answer to two decimal places. ______ If the market risk premium increased to 6%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. If the stock's beta is equal to...
12. Decompose the Total Return on the systematic and unsystematic portions of the following asset: Expected...
12. Decompose the Total Return on the systematic and unsystematic portions of the following asset: Expected Return market = 4% Risk Free - 1% Expected Return asset A-7% Actual Return Market = 2% Beta asset A .89 Actual Return asset A 5 % UNE (RM) = RM-E(R) UNE (RA) = RA-E(R) Systematic Portion of UNE Return = (Ry - ERBA Unsystematic Portion of UNE Return = (RA-E(R)) - (RM-E(R))BA Interpret your results
Click here to read the eBook: The Relationship Between Risk and Rates of Return BETA AND...
Click here to read the eBook: The Relationship Between Risk and Rates of Return BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%; the risk-free rate is 5.5%; and the market risk premium is 4%. a. What is the stock's beta? Round your answer to two decimal places. premium b. If the market risk premium increased to 9%, what would happen to the stock's required rate of retum? Assume that the risk-free rate and the...
Consider the following information about Stocks I and II: Rate of Return If State Occurs State...
Consider the following information about Stocks I and II: Rate of Return If State Occurs State of Economy Recession Normal Irrational exuberance Probability of State of Economy .20 .45 .35 Stock I .03 Stock II -.20 .05 .38 .28 .04 The market risk premium is 8 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a percent.) The standard deviation on Stock...
Beta and required rate of return A stock has a required return of 16%; the risk-free...
Beta and required rate of return A stock has a required return of 16%; the risk-free rate is 6.5%; and the market risk premium is 6%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. If the stock's beta is greater than 1.0, then the change in required rate...
1. In the context of the CAPM, the relevant risk is: a. Unique Risk b. Market...
1. In the context of the CAPM, the relevant risk is: a. Unique Risk b. Market risk c. Standard deviation of returns. d. Variance of returns e. Derivatives risk. 2. According the CAPM a well-diversified portfolio's rate of return is a function of: a. Systematic risk b. Unsystematic risk c. Unique risk d. Reinvestment risk e. Credit risk f. Derivatives risk 3. The RF rate and the expected market rate of return are 6 and 12% respectively. According the CAPM,...
Required return on Stock = Risk-free return + (Market risk premium)(Stock's beta) to compensate the investor for risk. If a stock's expected return plots below the SM If a stock's expected return plots on or above the SML, then the stock's return is -Select- the stock's return is -Select- to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up...
vto compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk. If a stock's expected return plots on or above the SML, then the stock's return is sufficient The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then...
Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about StocksI and II: Rate of Return If State Occurs State of Economy Stock II Probability of State of Economy .25 .45 .30 Stock .06 21 - 29 Recession Normal Irrational exuberance .09 .15 49 The market risk premium is 8 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a...
Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected return and risk values calculated for each of the assets are shown in the following table, B a. If the returns of assets V and W are perfectly positively correlated correlation coefficient = +1), describe the range of (1) expected return and (2)...
12. Decompose the Total Return on the systematic and unsystematic portions of the following asset: Expected Return market = 4% Risk Free - 1% Expected Return asset A-7% Actual Return Market = 2% Beta asset A .89 Actual Return asset A 5 % UNE (RM) = RM-E(R) UNE (RA) = RA-E(R) Systematic Portion of UNE Return = (Ry - ERBA Unsystematic Portion of UNE Return = (RA-E(R)) - (RM-E(R))BA Interpret your results
Click here to read the eBook: The Relationship Between Risk and Rates of Return BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%; the risk-free rate is 5.5%; and the market risk premium is 4%. a. What is the stock's beta? Round your answer to two decimal places. premium b. If the market risk premium increased to 9%, what would happen to the stock's required rate of retum? Assume that the risk-free rate and the...
Consider the following information about Stocks I and II: Rate of Return If State Occurs State of Economy Recession Normal Irrational exuberance Probability of State of Economy .20 .45 .35 Stock I .03 Stock II -.20 .05 .38 .28 .04 The market risk premium is 8 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a percent.) The standard deviation on Stock...
1. In the context of the CAPM, the relevant risk is: a. Unique Risk b. Market risk c. Standard deviation of returns. d. Variance of returns e. Derivatives risk. 2. According the CAPM a well-diversified portfolio's rate of return is a function of: a. Systematic risk b. Unsystematic risk c. Unique risk d. Reinvestment risk e. Credit risk f. Derivatives risk 3. The RF rate and the expected market rate of return are 6 and 12% respectively. According the CAPM,...
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