0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)

594 Ansichten20 SeitenFeb 17, 2011

© Attribution Non-Commercial (BY-NC)

DOC, PDF, TXT oder online auf Scribd lesen

Attribution Non-Commercial (BY-NC)

Als DOC, PDF, TXT **herunterladen** oder online auf Scribd lesen

0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)

594 Ansichten20 SeitenAttribution Non-Commercial (BY-NC)

Als DOC, PDF, TXT **herunterladen** oder online auf Scribd lesen

Sie sind auf Seite 1von 20

OVERVIEW

analysis, especially in terms of how it affects does concern investors. Only market risk is

security prices and rates of return. Invest- relevant; diversifiable risk is irrelevant to most

ment risk is associated with the probability investors because it can be eliminated.

of low or negative future returns. An attempt has been made to quantify

The riskiness of an asset can be market risk with a measure called beta. Beta is

considered in two ways: (1) on a stand-alone a measurement of how a particular firm’s

basis, where the asset’s cash flows are stock returns move relative to overall

analyzed all by themselves, or (2) in a movements of stock market returns. The

portfolio context, where the cash flows from a Capital Asset Pricing Model (CAPM), using

number of assets are combined and then the the concept of beta and investors’ aversion to

consolidated cash flows are analyzed. risk, specifies the relationship between market

In a portfolio context, an asset’s risk can risk and the required rate of return. This

be divided into two components: (1) a relationship can be visualized graphically with

diversifiable risk component, which can be the Security Market Line (SML). The slope of

diversified away and hence is of little concern the SML can change, or the line can shift

to diversified investors, and (2) a market risk upward or downward, in response to changes

component, which reflects the risk of a in risk or required rates of return.

general stock market decline and which

OUTLINE

With most investments, an individual or business spends money today with the expectation

of earning even more money in the future. The concept of return provides investors with a

convenient way of expressing the financial performance of an investment.

RISK AND RETURN

3-2

To make a meaningful judgment about the adequacy of the return, you

need to know the scale (size) of the investment.

You also need to know the timing of the return.

The solution to the scale and timing problems of dollar returns is to express investment

results as rates of return, or percentage returns.

Rate of return = .

Amount invested

return per unit of investment.

Expressing rates of return on an annual basis solves the timing problem.

Rate of return is the most common measure of investment performance.

Risk refers to the chance that some unfavorable event will occur. Investment risk is related

to the probability of actually earning less than the expected return; thus, the greater the

chance of low or negative returns, the riskier the investment.

An asset’s risk can be analyzed in two ways: (1) on a stand-alone basis, where the asset is

considered in isolation, and (2) on a portfolio basis, where the asset is held as one of a

number of assets in a portfolio.

No investment will be undertaken unless the expected rate of return is high enough to

compensate the investor for the perceived risk of the investment.

The probability distribution for an event is the listing of all the possible outcomes for the

event, with mathematical probabilities assigned to each.

An event’s probability is defined as the chance that the event will occur.

The sum of the probabilities for a particular event must equal 1.0, or 100 percent.

RISK AND RETURN

3-3

∧

The expected rate of return ( r ) is the sum of the products of each possible outcome times

its associated probability—it is a weighted average of the various possible outcomes,

with the weights being their probabilities of occurrence:

∧ n

E x p e cr at etoedfr e t u =r rn= ∑ Pi ri .

i =1

Where the number of possible outcomes is virtually unlimited, continuous

probability distributions are used in determining the expected rate of return of the

event.

The tighter, or more peaked, the probability distribution, the more likely it

is that the actual outcome will be close to the expected value, and, consequently, the

less likely it is that the actual return will end up far below the expected return. Thus,

the tighter the probability distribution, the lower the risk assigned to a stock.

One measure for determining the tightness of a distribution is the standard deviation, σ .

n ∧

S t a n dda er vd i a t=iσo =n ∑

i =1

( r i - r ) 2 Pi .

the expected value, and it gives you an idea of how far above or below the expected

value the actual value is likely to be.

Another useful measure of risk is the coefficient of variation (CV), which is the standard

deviation divided by the expected return. It shows the risk per unit of return, and it

provides a more meaningful basis for comparison when the expected returns on two

alternatives are not the same:

σ

Coefficien t of variation (CV) = .

r

RISK AND RETURN

3-4

Most investors are risk averse. This means that for two alternatives with the same expected

rate of return, investors will choose the one with the lower risk.

In a market dominated by risk-averse investors, riskier securities must have higher expected

returns, as estimated by the marginal investor, than less risky securities, for if this

situation does not hold, buying and selling in the market will force it to occur.

An asset held as part of a portfolio is less risky than the same asset held in isolation. This is

important, because most financial assets are not held in isolation; rather, they are held as

parts of portfolios. From the investor’s standpoint, what is important is the return on his

or her portfolio, and the portfolio’s risk—not the fact that a particular stock goes up or

down. Thus, the risk and return of an individual security should be analyzed in terms of

how it affects the risk and return of the portfolio in which it is held.

∧

r p , is the weighted average of the expected returns on the individual assets in the

portfolio, with the weights being the fraction of the total portfolio invested in each asset:

∧ n ∧

r p = ∑ wi r i .

i =1

deviations of the individual assets in the portfolio; the portfolio’s risk will be smaller than

the weighted average of the assets’ σ ‘s. The riskiness of a portfolio depends not only on

the standard deviations of the individual stocks, but also on the correlation between the

stocks.

The correlation coefficient, ρ , measures the tendency of two variables to

move together. With stocks, these variables are the individual stock returns.

Diversification does nothing to reduce risk if the portfolio consists of

perfectly positively correlated stocks.

As a rule, the riskiness of a portfolio will decline as the number of stocks

in the portfolio increases.

However, in the real world, where the correlations among the individual

stocks are generally positive but less than +1.0, some, but not all, risk can be

eliminated.

In the real world, it is impossible to form completely riskless stock

portfolios. Diversification can reduce risk, but cannot eliminate it.

RISK AND RETURN

3-5

While very large portfolios end up with a substantial amount of risk, it is not as much risk as

if all the money were invested in only one stock. Almost half of the riskiness inherent in

an average individual stock can be eliminated if the stock is held in a reasonably well-

diversified portfolio, which is one containing 40 or more stocks.

Diversifiable risk is that part of the risk of a stock which can be eliminated.

It is caused by events that are unique to a particular firm.

Market risk is that part of the risk which cannot be eliminated, and it stems

from factors which systematically affect most firms, such as war, inflation,

recessions, and high interest rates. It can be measured by the degree to which a

given stock tends to move up or down with the market. Thus, market risk is the

relevant risk, which reflects a security’s contribution to the portfolio’s risk.

The Capital Asset Pricing Model is an important tool for analyzing the

relationship between risk and rates of return. The model is based on the proposition

that any stock’s required rate of return is equal to the risk-free rate of return plus a

risk premium, which reflects only the risk remaining after diversification. Its

primary conclusion is: The relevant riskiness of an individual stock is its contribution

to the riskiness of a well-diversified portfolio.

The tendency of a stock to move with the market is reflected in its beta coefficient, b, which

is a measure of the stock’s volatility relative to that of an average stock.

An average-risk stock is defined as one that tends to move up and down in step with the

general market. By definition it has a beta of 1.0.

A stock that is twice as volatile as the market will have a beta of 2.0, while a stock that is half

as volatile as the market will have a beta coefficient of 0.5.

Since a stock’s beta measures its contribution to the riskiness of a portfolio, beta is the

theoretically correct measure of the stock’s riskiness.

The beta coefficient of a portfolio of securities is the weighted average of the individual

securities’ betas:

bp = ∑ w b.

i=1

i i

Since a stock’s beta coefficient determines how the stock affects the riskiness of a diversified

portfolio, beta is the most relevant measure of any stock’s risk.

The Capital Asset Pricing Model (CAPM) employs the concept of beta, which measures

risk as the relationship between a particular stock’s movements and the movements of the

RISK AND RETURN

3-6

overall stock market. The CAPM uses a stock’s beta, in conjunction with the average

investor’s degree of risk aversion, to calculate the return that investors require, rs, on that

particular stock.

relationship between risk as measured by Required Rate

of Return (%) SML = ri = rRF + (rM - rRF)bi

beta and the required rate of return for

individual securities. The SML equation

can be used to find the required rate of

return on Stock i: rM

Market risk premium

SML: ri = rRF + (rM – rRF)bi. rRF

securities, bi is the ith stock’s beta, and rM

is the return on the market or, 0.5 1.0 Risk, bi

alternatively, on an average stock.

The term rM – rRF is the market risk premium, RPM. This is a measure of

the additional return over the risk-free rate needed to compensate investors for

assuming an average amount of risk.

In the CAPM, the market risk premium, rM – rRF, is multiplied by the

stock’s beta coefficient to determine the additional premium over the risk-free rate

that is required to compensate investors for the risk inherent in a particular stock.

This premium may be larger or smaller than the premium required on an

average stock, depending on the riskiness of that stock in relation to the overall

market as measured by the stock’s beta.

The risk premium calculated by (rM – rRF)bi is added to the risk-free rate,

rRF (the rate on Treasury securities), to determine the total rate of return required by

investors on a particular stock, rs.

The slope of the SML, (rM – rRF), shows the increase in the required rate of

return for a one unit increase in risk. It reflects the degree of risk aversion in the

economy.

The risk-free (also known as the nominal, or quoted) rate of interest consists of two elements:

(1) a real inflation-free rate of return, r*, and (2) an inflation premium, IP, equal to the

anticipated rate of inflation.

The real rate on long-term Treasury bonds has historically ranged from 2

to 4 percent, with a mean of about 3 percent.

As the expected rate of inflation increases, a higher premium must be

added to the real risk-free rate to compensate for the loss of purchasing power that

results from inflation.

RISK AND RETURN

3-7

As risk aversion increases, so do the risk premium and, thus, the slope of the SML. The

greater the average investor’s aversion to risk, then (1) the steeper the slope of the line,

(2) the greater the risk premium for all stocks, and (3) the higher the required rate of

return on all stocks.

Many factors can affect a company’s beta. When such changes occur, the required rate of

return also changes.

A firm can influence its market risk, hence its beta, through changes in the

composition of its assets and also through its use of debt.

A company’s beta can also change as a result of external factors such as

increased competition in its industry, the expiration of basic patents, and the like.

For a management whose primary goal is stock price maximization, the overriding

consideration is the riskiness of the firm’s stock, and the relevant risk of any physical asset

must be measured in terms of its effect on the stock’s risk as seen by investors.

A number of recent studies have raised concerns about the validity of the CAPM.

A recent study by Fama and French found no historical relationship between stocks’ returns

and their market betas.

They found two variables which are consistently related to stock returns:

(1) a firm’s size and (2) its market/book ratio.

After adjusting for other factors, they found that smaller firms have

provided relatively high returns, and that returns are higher on stocks with low

market/book ratios. By contrast, after controlling for firm size and market/book

ratios, they found no relationship between a stock’s beta and its return.

As an alternative to the traditional CAPM, researchers and practitioners have begun to look

to more general multi-beta models that encompass the CAPM and address its

shortcomings.

In the multi-beta model, market risk is measured relative to a set of factors

that determine the behavior of asset returns, whereas the CAPM gauges risk only

relative to the market return.

The risk factors in the multi-beta model are all nondiversifiable sources of

risk.

Earnings volatility does not necessarily imply investment risk. You have to think about the

causes of the volatility before reaching any conclusions as to whether earnings volatility

indicates risk. However, stock price volatility does signify risk (except for stocks that are

negatively correlated with the market, which are few and far between, if they exist at all).

RISK AND RETURN

3-8

SELF-TEST QUESTIONS

Definitional

1. Investment risk is associated with the _____________ of low or negative returns; the

greater the chance of loss, the riskier the investment.

probability ______________.

and summing the results give the expected ________ of the distribution.

___________, a probability-weighted average deviation from the expected value.

5. Investors who prefer outcomes with a high degree of certainty to those that are less

certain are described as being ______ ________.

7. Diversification of a portfolio can result in lower ______ for the same level of return.

____________ correlated with each other.

9. That part of a stock’s risk that can be eliminated is known as _______________ risk,

while the portion that cannot be eliminated is called ________ risk.

10. The ______ coefficient measures a stock’s relative volatility as compared with a stock

market index.

11. A stock that is twice as volatile as the market would have a beta coefficient of _____,

while a stock with a beta of 0.5 would be only ______ as volatile as the market.

12. The beta coefficient of a portfolio is the __________ _________ of the betas of the

individual stocks.

13. The minimum expected return that will induce investors to buy a particular security is the

RISK AND RETURN

3-9

14. The security used to measure the ______-______ rate is the return available on U. S.

Treasury securities.

15. The risk premium for a particular stock may be calculated by multiplying the market risk

premium times the stock’s ______ _____________.

16. A stock’s required rate of return is equal to the ______-______ rate plus the stock’s

______ _________.

17. The risk-free rate on a short-term Treasury security is made up of two parts: the ______

______-______ rate plus a(n) ___________ premium.

18. Changes in investors’ risk aversion alter the _______ of the Security Market Line.

19. The concept of ________ provides investors with a convenient way of expressing the

financial performance of an investment.

20. An event’s _____________ is defined as the chance that the event will occur.

21. Investment returns can be expressed in ________ terms or as _______ ____ ________, or

percentage returns.

22. The _____________ ____ ___________ shows the risk per unit of return, and it provides

a more meaningful basis for comparison when the expected returns on two alternatives

are not the same.

Conceptual

23. The Y-axis intercept of the Security Market Line (SML) indicates the required rate of

return on an individual stock with a beta of 1.0.

a. True b. False

24. If a stock has a beta of zero, it will be riskless when held in isolation.

a. True b. False

25. A group of 200 stocks each has a beta of 1.0. We can be certain that each of the stocks

was positively correlated with the market.

a. True b. False

RISK AND RETURN

3 - 10

26. Refer to Self-Test Question 25. If we combined these same 200 stocks into a portfolio,

market risk would be reduced below the average market risk of the stocks in the portfolio.

a. True b. False

27. Refer to Self-Test Question 26. The standard deviation of the portfolio of these 200

stocks would be lower than the standard deviations of the individual stocks.

a. True b. False

28. Suppose rRF = 7% and rM = 12%. If investors became more risk averse, rM would be

likely to decrease.

a. True b. False

29. Refer to Self-Test Question 28. The required rate of return for a stock with b = 0.5 would

increase more than for a stock with b = 2.0.

a. True b. False

30. Refer to Self-Test Questions 28 and 29. If the expected rate of inflation increased, the

required rate of return on a b = 2.0 stock would rise by more than that of a b = 0.5 stock.

a. True b. False

31. Which is the best measure of risk for an asset held in a well-diversified portfolio?

a. Variance d. Semi-variance

b. Standard deviation e. Expected value

c. Beta

32. In a portfolio of three different stocks, which of the following could not be true?

a. The riskiness of the portfolio is less than the riskiness of each stock held in isolation.

b. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.

c. The beta of the portfolio is less than the beta of each of the individual stocks.

d. The beta of the portfolio is greater than the beta of one or two of the individual

stocks.

e. The beta of the portfolio is equal to the beta of one of the individual stocks.

33. If investors expected inflation to increase in the future, and they also became more risk

RISK AND RETURN

3 - 11

averse, what could be said about the change in the Security Market Line (SML)?

b. The SML would shift up and the slope would decrease.

c. The SML would shift down and the slope would increase.

d. The SML would shift down and the slope would decrease.

e. The SML would remain unchanged.

a. The SML relates required returns to firms’ market risk. The slope and intercept of

this line cannot be controlled by the financial manager.

b. The slope of the SML is determined by the value of beta.

c. If you plotted the returns of a given stock against those of the market, and if you

found that the slope of the regression line was negative, then the CAPM would

indicate that the required rate of return on the stock should be less than the risk-free

rate for a well-diversified investor, assuming that the observed relationship is

expected to continue on into the future.

d. If investors become less risk averse, the slope of the Security Market Line will

increase.

e. Statements a and c are both true.

a. Normally, the Security Market Line has an upward slope. However, at one of those

unusual times when the yield curve on bonds is downward sloping, the SML will also

have a downward slope.

b. The market risk premium, as it is used in the CAPM theory, is equal to the required

rate of return on an average stock minus the required rate of return on an average

company’s bonds.

c. If the marginal investor’s aversion to risk decreases, then the slope of the yield curve

would, other things held constant, tend to increase. If expectations for inflation also

increased at the same time risk aversion was decreasing—say the expected inflation

rate rose from 5 percent to 8 percent—the net effect could possibly result in a parallel

upward shift in the SML.

d. According to the text, it is theoretically possible to combine two stocks, each of

which would be quite risky if held as your only asset, and to form a 2-stock portfolio

that is riskless. However, the stocks would have to have a correlation coefficient of

expected future returns of -1.0, and it is hard to find such stocks in the real world.

e. Each of the above statements is false.

RISK AND RETURN

3 - 12

∧

a. The expected future rate of return, r , is always above the past realized rate of return,

r , except for highly risk-averse investors.

∧

b. The expected future rate of return, r , is always below the past realized rate of return,

r , except for highly risk-averse investors.

∧

c. The expected future rate of return, r , is always below the required rate of return, r,

except for highly risk-averse investors.

d. There is no logical reason to think that any relationship exists between the expected

∧

future rate of return, r , on a security and the security’s required rate of return, r.

e. Each of the above statements is false.

a. Someone who is highly averse to risk should invest in stocks with high betas (above

+1.0), other things held constant.

b. The returns on a stock might be highly uncertain in the sense that they could actually

turn out to be much higher or much lower than the expected rate of return (that is, the

stock has a high standard deviation of returns), yet the stock might still be regarded

by most investors as being less risky than some other stock whose returns are less

variable.

c. The standard deviation is a better measure of risk when comparing securities than the

coefficient of variation. This is true because the standard deviation “standardizes”

risk by dividing each security’s variance by its expected rate of return.

d. Market risk can be reduced by holding a large portfolio of stocks, and if a portfolio

consists of all traded stocks, market risk will be completely eliminated.

e. The market risk in a portfolio declines as more stocks are added to the portfolio, and

the risk decline is linear, that is, each additional stock reduces the portfolio’s risk by

the same amount.

RISK AND RETURN

3 - 13

SELF-TEST PROBLEMS

Probability Rate of Return

0.1 -15%

0.2 0

0.4 5

0.2 10

0.1 25

What is Stock A’s expected rate of return and standard deviation?

b. 8.0%; 6.5% e. 5.0%; 9.5%

c. 5.0%; 3.5%

2. If rRF = 5%, rM = 11%, and b = 1.3 for Stock X, what is rX, the required rate of return for

Stock X?

3. Refer to Self-Test Problem 2. What would rX be if investors expected the inflation rate to

increase by 2 percentage points?

caused the market risk premium to increase by 3 percentage points? rRF remains at 5

percent.

5. Refer to Self-Test Problem 2. What would kX be if investors expected the inflation rate to

increase by 2 percentage points and their risk aversion increased by 3 percentage points?

RISK AND RETURN

3 - 14

6. Jan Middleton owns a 3-stock portfolio with a total investment value equal to $300,000.

Stock Investment Beta

A $100,000 0.5

B 100,000 1.0

C 100,000 1.5

Total $300,000

What is the weighted average beta of Jan’s 3-stock portfolio?

7. The Apple Investment Fund has a total investment of $450 million in five stocks.

Stock Investment (Millions) Beta

1 $130 0.4

2 110 1.5

3 70 3.0

4 90 2.0

5 50 1.0

Total $450

What is the fund’s overall, or weighted average, beta?

8. Refer to Self-Test Problem 7. If the risk-free rate is 12 percent and the market risk

premium is 6 percent, what is the required rate of return on the Apple Fund?

9. Stock A has a beta of 1.2, Stock B has a beta of 0.6, the expected rate of return on an

average stock is 12 percent, and the risk-free rate of return is 7 percent. By how much

does the required return on the riskier stock exceed the required return on the less risky

stock?

10. You are managing a portfolio of 10 stocks which are held in equal dollar amounts. The

current beta of the portfolio is 1.8, and the beta of Stock A is 2.0. If Stock A is sold and

the proceeds are used to purchase a replacement stock, what does the beta of the

replacement stock have to be to lower the portfolio beta to 1.7?

RISK AND RETURN

3 - 15

11. Consider the following information for the Alachua Retirement Fund, with a total

investment of $4 million.

Stock Investment Beta

A $ 400,000 1.2

B 600,000 -0.4

C 1,000,000 1.5

D 2,000,000 0.8

Total $4,000,000

The market required rate of return is 12 percent, and the risk-free rate is 6 percent. What

is its required rate of return?

Probability Return

0.4 $30

0.5 25

0.1 -20

What is the coefficient of variation of the expected dollar returns?

13. If the risk-free rate is 8 percent, the expected return on the market is 13 percent, and the

expected return on Security J is 15 percent, then what is the beta of Security J?

RISK AND RETURN

3 - 16

2. outcomes; distribution 13. required

3. probability; return 14. risk-free

4. standard deviation 15. beta coefficient

5. risk averse 16. risk-free; risk premium

6. diversification 17. real risk-free; inflation

7. risk 18. slope

8. positively 19. return

9. diversifiable; market 20. probability

10. beta 21. dollar; rates of return

11. 2.0; half 22. coefficient of variation

23. b. The Y-axis intercept of the SML is rRF, which is the required rate of return on a

security with a beta of zero.

24. b. A zero beta stock could be made riskless if it were combined with enough other zero

beta stocks, but it would still have company-specific risk and be risky when held in

isolation.

25. a. By definition, if a stock has a beta of 1.0 it moves exactly with the market. In other

words, if the market moves up by 7 percent, the stock will also move up by 7 percent,

while if the market falls by 7 percent, the stock will fall by 7 percent.

26. b. Market risk is measured by the beta coefficient. The beta for the portfolio would be a

weighted average of the betas of the stocks, so bp would also be 1.0. Thus, the market

risk for the portfolio would be the same as the market risk of the stocks in the

portfolio.

27. a. Note that with a 200-stock portfolio, the actual returns would all be on or close to the

regression line. However, when the portfolio (and the market) returns are quite high,

some individual stocks would have higher returns than the portfolio, and some would

have much lower returns. Thus, the range of returns, and the standard deviation,

would be higher for the individual stocks.

28. b. RPM, which is equal to rM − rRF, would rise, leading to an increase in rM.

29. b. The required rate of return for a stock with b = 0.5 would increase less than the return

on a stock with b = 2.0.

RISK AND RETURN

3 - 17

30. b. If the expected rate of inflation increased, the SML would shift parallel due to an

increase in rRF. Thus, the effect on the required rates of return for both the b = 0.5 and

b = 2.0 stocks would be the same.

31. c. The best measure of risk is the beta coefficient, which is a measure of the extent to

which the returns on a given stock move with the stock market.

32. c. The beta of the portfolio is a weighted average of the individual securities’ betas, so it

could not be less than the betas of all of the stocks. (See Self-Test Problem 6.)

33. a. The increase in inflation would cause the SML to shift up, and investors becoming

more risk averse would cause the slope to increase. (This can be demonstrated by

graphing the SML lines on the same graph in Self-Test Problems 2 through 5.)

34. e. Statement b is false because the slope of the SML is r M − rRF. Statement d is false

because as investors become less risk averse the slope of the SML decreases.

Statement a is correct because the financial manager has no control over rM or rRF. (rM

− rRF = slope and rRF = intercept of the SML.) Statement c is correct because the slope

of the regression line is beta and beta would be negative; thus, the required return

would be less than the risk-free rate.

35. d. Statement a is false. The yield curve determines the value of rRF; however, SML = rRF

+ (rM − rRF)b. The average return on the market will always be greater than the risk-

free rate; thus, the SML will always be upward sloping. Statement b is false because

RPM is equal to rM − rRF. rRF is equal to the risk-free rate, not the rate on an average

company’s bonds. Statement c is false. A decrease in an investor’s aversion to risk

would indicate a downward sloping yield curve. A decrease in risk aversion and an

increase in inflation would cause the SML slope to decrease and to shift upward

simultaneously.

36. e. All the statements are false. For equilibrium to exist, the expected return must equal

the required return.

37. b. Statement b is correct because the stock with the higher standard deviation might not

be highly correlated with most other stocks, hence have a relatively low beta, and thus

not be very risky if held in a well-diversified portfolio. The other statements are

simply false.

RISK AND RETURN

3 - 18

∧

1. e. r A = 0.1 (-15%) + 0.2(0%) + 0.4(5%) + 0.2(10%) + 0.1(25) = 5.0%.

+ 0.2(0.10 – 0.05)2 + 0.1(0.25 – 0.05)2

= 0.009.

A change in the inflation premium does not change the market risk premium

(rM − rRF) since both rM and rRF are affected.

b p = ∑ w i bi

7. d. i= 1

$1 3 0 $1 1 0 $7 0 $9 0 $5 0

= (0.4) + (1.5) + (3.0) + (2.0) + (1.0) = 1.4 6.

$4 5 0 $4 5 0 $4 5 0 $4 5 0 $4 5 0

RISK AND RETURN

3 - 19

rA = 7% + 5%(1.20) = 13.0%.

rB = 7% + 5%(0.60) = 10.0%.

1.8 = 0.9(bR) + 0.1(2.0)

1.8 = 0.9(bR) + 0.2

1.6 = 0.9(bR)

bR = 1.78.

Now find the beta of the new stock that produces bp = 1.7.

1.7 = 1.6 + 0.1(bN)

0.1 = 0.1(bN)

bN = 1.0.

Investment x Beta.

400,000 .

600,000 ..

1,000,000 ..

2,000,000 ..

bp = 0.8350 = Portfolio beta

Write out the SML equation, and substitute known values including the portfolio beta.

Solve for the required portfolio return.

= 6% + 5.01% = 11.01%.

RISK AND RETURN

3 - 20

12. b. Use the given probability distribution of returns to calculate the expected value,

variance, standard deviation, and coefficient of variation.

∧ ∧ ∧

Pi ri Pi ri ri ( ri − r ) ( ri − r ) 2

r

∧

P( ri − r ) 2

0.4 x $30 = $12.0 $30 - $22.5 = $ 7.5 $ 56.25 $ 22.500

0.5 x 25 = 12.5 25 - 22.5 = 2.5 6.25 3.125

0.1 x -20 = -2.0 -20 - 22.5 = -42.5 1,806.25 180.625

∧

r = $22.5 σ2 = Variance =

$206.250

∧

The standard deviation (σ) of r is $206 .25 =$14 .3614 .

Use the standard deviation and the expected return to calculate the coefficient of

variation: $14.3614/$22.5 = 0.6383.

13. a. Use the SML equation, substitute in the known values, and solve for beta.

rRF = 8%; rM = 13%; rJ = 15%.

15% = 8% + (13% – 8%)bJ

7% = (5%)bJ

bJ = 1.4.

## Viel mehr als nur Dokumente.

Entdecken, was Scribd alles zu bieten hat, inklusive Bücher und Hörbücher von großen Verlagen.

Jederzeit kündbar.