Podcast
Questions and Answers
What is the market risk premium calculated in the content?
What is the market risk premium calculated in the content?
- 11.5%
- 20.30%
- 4.5%
- 7% (correct)
Which company's required return was calculated using the CAPM to be 23.9%?
Which company's required return was calculated using the CAPM to be 23.9%?
- Southwest Airlines
- Eastman Kodak
- Praxair (correct)
- US Bancorp
What is the portfolio beta calculated in the content?
What is the portfolio beta calculated in the content?
- 1.833 (correct)
- 2.9
- 0.7
- 1.5
Which required return model provided a higher estimate for US Bancorp?
Which required return model provided a higher estimate for US Bancorp?
What is the risk premium for Southwest Airlines calculated using its beta?
What is the risk premium for Southwest Airlines calculated using its beta?
Can a market be semi-strong-form efficient but not weak-form efficient?
Can a market be semi-strong-form efficient but not weak-form efficient?
If the market usually overreacts to bad news, what is a potential strategy for making a profit?
If the market usually overreacts to bad news, what is a potential strategy for making a profit?
Why is the shareholders' required return important for corporate managers?
Why is the shareholders' required return important for corporate managers?
What is the required return if the risk-free rate is 3 percent and the risk premium is 5 percent?
What is the required return if the risk-free rate is 3 percent and the risk premium is 5 percent?
What is Hastings' required return if it has a beta of 0.65, the market return is expected at 11 percent, and the risk-free rate is 4 percent?
What is Hastings' required return if it has a beta of 0.65, the market return is expected at 11 percent, and the risk-free rate is 4 percent?
If you have a portfolio with a beta of 1.35, what will the new portfolio beta be if you invest 85 percent in it and 15 percent in a stock with a beta of 0.78?
If you have a portfolio with a beta of 1.35, what will the new portfolio beta be if you invest 85 percent in it and 15 percent in a stock with a beta of 0.78?
What happens to the required return if the risk-free rate decreases while holding the risk premium constant?
What happens to the required return if the risk-free rate decreases while holding the risk premium constant?
Which statement about market efficiency is accurate?
Which statement about market efficiency is accurate?
What distinguishes average return from expected return?
What distinguishes average return from expected return?
Why do investors accept market risk when investing?
Why do investors accept market risk when investing?
What is the significance of portfolios on the capital market line compared to those on the efficient frontier?
What is the significance of portfolios on the capital market line compared to those on the efficient frontier?
What is one reason a firm’s beta might be considered too low?
What is one reason a firm’s beta might be considered too low?
Which method is used to measure both historical and expected risk?
Which method is used to measure both historical and expected risk?
Which firm mentioned seems to have an appropriate beta reflecting its market risk?
Which firm mentioned seems to have an appropriate beta reflecting its market risk?
What type of average is used to compute average return?
What type of average is used to compute average return?
What does a higher beta value indicate about a firm?
What does a higher beta value indicate about a firm?
What is Paccar's required return based on the projected dividend and growth rate?
What is Paccar's required return based on the projected dividend and growth rate?
What is the expected return from the given economic state probability distribution?
What is the expected return from the given economic state probability distribution?
What is the portfolio beta of an investor with $10,000 in Olympic Steel, $7,000 in Rent-a-Center, and $8,000 in Lincoln Educational?
What is the portfolio beta of an investor with $10,000 in Olympic Steel, $7,000 in Rent-a-Center, and $8,000 in Lincoln Educational?
Which component is NOT involved in calculating the standard deviation of expected return?
Which component is NOT involved in calculating the standard deviation of expected return?
How do you calculate the weight of Olympic Steel in the portfolio?
How do you calculate the weight of Olympic Steel in the portfolio?
Which of the following values represents the risk-free rate mentioned in the problems?
Which of the following values represents the risk-free rate mentioned in the problems?
What is the market risk premium if the market return is 11.5% and the risk-free rate is 4.5%?
What is the market risk premium if the market return is 11.5% and the risk-free rate is 4.5%?
What is the overall portfolio value calculated from the investments listed?
What is the overall portfolio value calculated from the investments listed?
Flashcards
Average Return vs. Expected Return
Average Return vs. Expected Return
Average return is calculated using historical data, while expected return is a forward-looking estimate based on probabilities of future returns.
Risk Premium
Risk Premium
The extra return investors expect to earn for taking on the risk of investing in the market compared to investing in a risk-free asset.
Capital Market Line (CML)
Capital Market Line (CML)
A line representing the best possible risk-return combinations for portfolios that include the market portfolio and the risk-free asset.
Efficient Frontier
Efficient Frontier
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Beta
Beta
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Diversified Firms
Diversified Firms
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Market Share Battle
Market Share Battle
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Financial Firm
Financial Firm
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Market Risk Premium
Market Risk Premium
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Company Risk Premium
Company Risk Premium
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CAPM (Capital Asset Pricing Model)
CAPM (Capital Asset Pricing Model)
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Constant Growth Model
Constant Growth Model
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Required Return
Required Return
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Expected Return
Expected Return
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Standard Deviation
Standard Deviation
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Portfolio Beta
Portfolio Beta
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Risk Premium of Stock
Risk Premium of Stock
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Risk Premium of Portfolio
Risk Premium of Portfolio
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Semi-strong form efficiency
Semi-strong form efficiency
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Weak-form efficiency
Weak-form efficiency
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Overreaction to bad news
Overreaction to bad news
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Shareholders' required return
Shareholders' required return
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Risk-free rate
Risk-free rate
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Study Notes
Problem Set 10 - Study Notes
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Problem 1 (a): Average return is calculated by averaging historical returns. Expected return is a forward-looking estimate, weighted by the probability of different outcomes. Both methods use historical data, though expected return is forward-looking. Historical risk and expected risk (both measured in standard deviation) use historical return data.
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Problem 1 (b): People take investment risk to potentially earn a risk premium (more return than risk-free investment). This allows for significant wealth growth, but investors must have a long-term perspective and acknowledge potential short-term losses.
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Problem 2 (a): Portfolios on the Capital Market Line (CML) provide better risk-return trade-offs because they offer higher returns at every risk level compared to the efficient frontier.
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Problem 2 (b): Procter & Gamble and Johnson & Johnson have reasonable betas (0.38, 0.70), indicating appropriate risk for their firm types. Nike's (0.84) beta is potentially too low, hinting at lower risk than expected. Goldman Sachs' beta (1.50) is high, implying a relatively high level of risk compared to competitors like JPMorgan Chase (1.22).
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Problem 3 (a): A market can be semi-strong-form efficient but not weak-form efficient. This is contradictory - a market cannot be semi-strong-form efficient without also being weak-form efficient because weak-form efficiency is essentially a subset of or part of the semi-strong-form.
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Problem 3 (b): If the market overreacts to bad news, investors could profit by buying stocks after significant price drop due to bad news, and capitalizing on the rebound.
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Problem 4: Shareholders' required return is important because managers must ensure the projects they fund (using shareholder resources) achieve a return that exceeds the required return. This is crucial to maintain investor confidence and secure future funding.
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Problem 5: Required return = risk-free rate + risk premium (3% + 5% = 8%).
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Problem 6: Hastings Entertainment's required return (using CAPM) is 8.55% (risk-free rate + beta * market risk premium).
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Problem 7: The new portfolio's beta is found by weighting the old portfolio beta with the new stock beta. (0.85 multiplied by old portfolio Beta + 0.15 multiplied by new beta).
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Problem 8: Paccar's required return is calculated by using the formula from slide 10-31 (use the formula from the provided slide).
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Problem 9: Standard Deviation (calculate the standard deviation for the different returns given).
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Problem 10: This problem involves calculating the portfolio beta. This requires calculating the weight of each stock in the portfolio and then using those weights to calculate the weighted average beta.
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Problem 11: This problem also involves calculating portfolio beta. Again, find the weight of each stock in the portfolio, and then find the average.
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Problem 12: Required return for each company is calculated using both CAPM and the constant-growth model. Results are then compared.
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Description
This quiz covers advanced concepts in investment analysis, including the calculation of average and expected returns, risk premiums, and the Capital Market Line. It explores portfolio efficiency and risk measurements in financial markets. Prepare to test your understanding of these key topics and their implications for investing.
