Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Question
Chapter 10, Problem 27QP
Summary Introduction
To determine: The probability of losing all the money invested in common stock.
Introduction:
The
Standard deviation refers to the variation in the actual observations from the average.
Z-Score helps to know how many numbers of standard deviations is the raw score or outcome away from the average or mean.
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Students have asked these similar questions
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."
The following table represents the rate of returns of two stocks in different
economic conditions along with their probabilities (the data are also uploaded on
moodle)
RATES OF RETURN ON STOCKS
EXPECTED
ECONOMIC
PROBABILITY
STOCK A
STOCK B
CONDITIONS
RECESSION
0.55
-0.04
-0.02
STABLE
0.35
0.25
0.30
EXPANDING
0.10
0.15
0.20
Answer the following by using mathematical calculations:
a) Calculate the expected rate of return for each stock respectively. Explain
what the expected value implies.
b) Calculate the standard deviation for each stock respectively. Explain what
the standard deviation implies.
c) If you were an investor in which stock you were going to invest? Justify
your answer.
d) Calculate the covariance between Stock A and stock B. Discuss.
e) Calculate the expected return and the standard deviation of the portfolio
consisting 40% in stock A and 60% in stock B.
f) Discuss the risk and return associated with investing
i All of your funds in stock A
ii. All of your funds in stock…
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible
circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return
expected to result during each state of nature by its probability of occurrence.
Consider the following case:
Aaron owns a two-stock portfolio that invests in Blue Liama Mining Company (BLM) and Hungry Whale Energy (HWE). Three-quarters of Aaron's
portfolio value consists of BLM's shares, and the balance consists of HWE's shares.
Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market
conditions are detailed in the following table:
Market Condition Probability of Occurrence
20%
35%
45%
Strong
Normal
Weak
Blue Llama Mining Hungry Whale Energy,
10%
14%
6%
-8%
8%
-10%
Calculate expected returns for the…
Chapter 10 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10.1 - Prob. 10.1ACQCh. 10.1 - Why are unrealized capital gains or losses...Ch. 10.1 - What is the difference between a dollar return and...Ch. 10.2 - Prob. 10.2ACQCh. 10.2 - Prob. 10.2BCQCh. 10.2 - Prob. 10.2CCQCh. 10.2 - Prob. 10.2DCQCh. 10.2 - Prob. 10.2ECQCh. 10.2 - Prob. 10.2FCQCh. 10.3 - What do we mean by excess return and risk premium?
Ch. 10.3 - Prob. 10.3BCQCh. 10.3 - Prob. 10.3CCQCh. 10.3 - What is the first lesson from capital market...Ch. 10.4 - In words, how do we calculate a variance? A...Ch. 10.4 - Prob. 10.4BCQCh. 10.4 - Prob. 10.4CCQCh. 10.4 - What is the second lesson from capital market...Ch. 10.5 - Prob. 10.5ACQCh. 10.5 - Prob. 10.5BCQCh. 10.6 - What is an efficient market?Ch. 10.6 - Prob. 10.6BCQCh. 10 - Section 10.1Say you buy a share of stock for 50....Ch. 10 - Prob. 10.3CCh. 10 - Prob. 10.4CCh. 10 - Prob. 10.5CCh. 10 - Prob. 10.6CCh. 10 - Prob. 1CTCRCh. 10 - Prob. 2CTCRCh. 10 - Risk and Return. We have seen that over long...Ch. 10 - Market Efficiency Implications. Explain why a...Ch. 10 - Prob. 5CTCRCh. 10 - Prob. 6CTCRCh. 10 - Prob. 7CTCRCh. 10 - Prob. 8CTCRCh. 10 - Efficient Markets Hypothesis. There are several...Ch. 10 - Prob. 10CTCRCh. 10 - Prob. 1QPCh. 10 - Prob. 2QPCh. 10 - Prob. 3QPCh. 10 - Prob. 4QPCh. 10 - Nominal versus Real Returns. What was the...Ch. 10 - Bond Returns. What is the historical real return...Ch. 10 - Prob. 7QPCh. 10 - Prob. 8QPCh. 10 - Prob. 9QPCh. 10 - Calculating Real Returns and Risk Premiums. For...Ch. 10 - Prob. 11QPCh. 10 - Prob. 12QPCh. 10 - Calculating Returns. You purchased a zero-coupon...Ch. 10 - Prob. 14QPCh. 10 - Prob. 15QPCh. 10 - Calculating Real Returns. Refer to Table 10.1....Ch. 10 - Return Distributions. Refer back to Figure 10.10....Ch. 10 - Prob. 18QPCh. 10 - Prob. 19QPCh. 10 - Arithmetic and Geometric Returns. A stock has had...Ch. 10 - Prob. 21QPCh. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Prob. 24QPCh. 10 - Prob. 25QPCh. 10 - Prob. 26QPCh. 10 - Prob. 27QPCh. 10 - Prob. 28QPCh. 10 - Prob. 1CCCh. 10 - Prob. 2CCCh. 10 - Prob. 3CCCh. 10 - Prob. 4CCCh. 10 - Prob. 5CC
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