11 If Another Security Had A Lower Beta Than Indicated In Problem 10 Would Ki Be Lower Or Higher What Is The Logic Behind Your Answer In Terms Of Risk Essays and Term Papers
,
have a maturity of 10 years, and are priced to yield 8.0%. What price percentage would
investors expect to pay for the new bonds? Give youranswer in percentage terms.
95.81
Use the bond features on your calculator to solve this problem. Enter
7.375% as the coupon rate and 8.0% as the yield to...
your solutions to the correct answers in the Answer Key that follow on the next page.
8. Onyx Corporation has a beta of 1.50. The risk-free rate of return is 10% and the expected return on the market portfolio is 12%. What rate of return would investors in Onyx Corporation expect to earn? _____a...
, but brieﬂy, the reason is that shortterm securities have less interest rate riskthan longer-termsecurities, hence smaller MRPs. Therefore, short-term rates are normally lowerthan long-term rates.
SELF-TEST QUESTIONS What is a yield curve, and what information would you need to draw this curve...
always have a lowerbetathan a one-stock portfolio.
d. All of the statements above are correct.
e. None of the statements above is correct.
Portfolio risk and return Answer: a Diff: E
[xi]. Which of the following statements best describes whatwould be expected to happen as you...
would you lose faith in the CAPM? Figure 13.5 shows whatsecurity market relations could look like if the CAPM did not work. In plot (a), the rate of return does not seem to increase linearly with beta if beta is greater than about 0.5. Because beta is a measure of risk contribution to your market...
associated with short-term borrowing is lowerthan that associated with long-term borrowing.
Another reason the
firm might not wish to entirely use long-term debt is that if there
are seasonal funds requirements it would be borrowing at certain
times when the funds were not needed.
10...
%(0.985) = 14.9%.
J. 1. SUPPOSE INVESTORS RAISED THEIR INFLATION EXPECTATIONS BY 3 PERCENTAGE POINTS OVER CURRENT ESTIMATES AS REFLECTED IN THE 8 PERCENT T-BILL RATE. WHAT EFFECT WOULDHIGHER INFLATION HAVE ON THE SML AND ON THE RETURNS REQUIRED ON HIGH- AND LOW-RISKSECURITIES?
ANSWER: [SHOW...
have lower rates; higherrisk municipals can (and often do) have higher rates.
10. AIMR suggested answer:
a. The pure expectations theory states the term structure of interest rates is explained entirely by interest rate expectations. The theory assumes that forward rates of...
T-bills during this period? 11. Whatwouldyour required rate of return be on common stocks if you wanted a 5 percent risk premium to own common stocks given what you know from Problem10? If common stock investors became more risk averse, whatwould happen to the required rate of return on common...
you think SIVMED’s historical betawould be better or worse measure of SIVMED’s future market riskthan the historical beta for an average NYSE company would be for its futuremarket risk? Explain youranswer.
Historical Market Betas
The conventional approach for estimating the beta of an...
.
c. Had the firm used the weighted average cost calculated in part b, what
actions would have been indicated relative to projects 263 and 264?
d. Compare and contrast the firm’s actions with your findings in part c. Which
decision method seems more appropriate? Explain why.
LG2
10–2
Cost of...
average return on this portfolio have been higher or lower? Explain your results. 14. Look back at Table 7.5 on page 174. a. What is the beta of a portfolio that has 40% invested in Disney and 60% in Exxon Mobil?
208
Part Two
Risk
b. Would you invest in this portfolio if you had no superior...
levered ﬁrm’s projects that have similar risks to the ﬁrm as a whole. Is the discount rate for the projects higher or lowerthan the rate computed using the security market line? Why? 10. BetaWhat factors determine the beta of a stock? Deﬁne and describe each.
QUESTIONS AND PROBLEMS
1...
other securities issued by your firm. All you have to do to determine r is to answer the question, What interest rate would my firm have to pay to borrow money directly from the capital markets rather than from the government? Suppose that this rate is 10 percent. Then NPV 100,000 100,000 100,000...
calculate the average return that you could have earned over this period if you had
held a combination of the market and a risk-free loan. Make sure that the combination
has the same beta as Ms. Sauros’s portfolio. Wouldyour average return on this portfolio have been higher or lower?
Explain your...
value of the lump sum at the end of year 5? b. What is the future value of the mixed stream at the end of year 5? c. Based on your findings in parts (a) and (b), which alternative should Gina take? d. If Gina could earn 10 percent rather than 7 percent on the funds, wouldyour recommendation in part...
terms of both betarisk and total risk. Which of the following statements is most correct?
* Riskier-than-average projects should have their IRRs increased to reflect their added riskiness. Clearly, this would make the project acceptable regardless of the amount of the adjustment. * The accept...
example, what if investors, because personal tax rates on capital gains are lowerthan those on dividends, value capital gains more highly than dividends? Then, if two stocks had the same market risk, the stock paying the higher dividend would have the higher required rate of return. In that case...
) - Rf) = 4 + (1.2 x 5) = 10% The CAPM predicts that the cost of equity of RD Co is 10%. The same answerwould have been found if the information had given the return on the market as 9%, rather than giving the equity risk premium as 5%. ASSET BETAS, EQUITY BETAS, AND DEBT BETAS If a company has no debt...
-end fund
closed-end fund load hedge fund 12b-1 fees
soft dollars turnover exchange-traded funds
KEY TERMS
1. Would you expect a typical open-end fixed-income mutual fund to have higher or lower operating expenses than a fixed-income unit investment trust? Why? 2. What are some...