CengageNOW homework Finance
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cengage_now_2.docxCengage Now
1.The standard deviation of stock returns for Stock A is 42%. The standard deviation of the market return is 21%. If the correlation between Stock A and the market is 0.60, then what is Stock A's beta? Round your answer to two decimal places.
2. Two-Asset Portfolio
Stock A has an expected return of 12% and a standard deviation of 45%. Stock B has an expected return of 16% and a standard deviation of 55%. The correlation coefficient between Stocks A and B is 0.2. What is the expected return of a portfolio invested 30% in Stock A and 70% in Stock B? Round your answer to two decimal places.
%
What is the standard deviation of a portfolio invested 30% in Stock A and 70% in Stock B? Round your answer to two decimal places.
%
3. Characteristic Line and Security Market Line
You are given the following set of data:
|
|
|
HISTORICAL RATES OF RETURN |
||
|
Year |
NYSE |
Stock X |
||
|
1 |
|
- 26.5% |
|
- 12.0% |
|
2 |
|
37.2 |
|
19.0 |
|
3 |
|
23.8 |
|
14.5 |
|
4 |
|
- 7.2 |
|
6.0 |
|
5 |
|
6.6 |
|
9.1 |
|
6 |
|
20.5 |
|
19.1 |
|
7 |
|
30.6 |
|
15.3 |
a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Round your answer to two decimal places. Beta =
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. Round your answers to two decimal places.
|
c. |
|
Stock X |
|
NYSE |
|
Average return, |
|
% |
|
% |
|
Standard deviation, σ |
|
% |
|
% |
d.
e. Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., , , and both σx and bx in the future will equal their past values). Also assume that Stock X is in equilibrium - that is, it plots on the Security Market Line. What is the risk-free rate? Round your answer to two decimal places. %
5. Characteristic Line and Security Market Line
You are given the following set of data:
|
|
|
HISTORICAL RATES OF RETURN |
||
|
Year |
NYSE |
Stock X |
||
|
1 |
|
- 26.5% |
|
- 12.0% |
|
2 |
|
37.2 |
|
19.0 |
|
3 |
|
23.8 |
|
14.5 |
|
4 |
|
- 7.2 |
|
6.0 |
|
5 |
|
6.6 |
|
9.1 |
|
6 |
|
20.5 |
|
19.1 |
|
7 |
|
30.6 |
|
15.3 |
a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Round your answer to two decimal places. Beta =
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. Round your answers to two decimal places.
|
c. |
|
Stock X |
|
NYSE |
|
Average return, |
|
% |
|
% |
|
Standard deviation, σ |
|
% |
|
% |
d.
e. Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., , , and both σx and bx in the future will equal their past values). Also assume that Stock X is in equilibrium - that is, it plots on the Security Market Line. What is the risk-free rate? Round your answer to two decimal places. %
6. Premium for Financial Risk
Ethier Enterprise has an unlevered beta of 1.3. Ethier is financed with 55% debt and has a levered beta of 1.6. If the risk free rate is 5.5% and the market risk premium is 4%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.
%
