Chapter 2: Q19I. (page 143)
What is the reward-to-volatility ratio for the equity fund in the previous problem?
Reward-to-volatility ratio for the equity fund = 0.71
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“Highly variable stock prices suggest that the market does not know how to price stocks.” Respond.
The APT itself does not provide information on the factors that one might expect to determine risk premiums. How should researchers decide which factors to investigate?
Is industrial production a reasonable factor to test for a risk premium? Why or why not?
Probabilities for three states of the economy and probabilities for the returns on a particular stock in each state are shown in the table below:
Question: What is the probability that the economy will be neutral and the stock will experience poor performance?
Which of the following statements about the security market line (SML) are true?
a. The SML provides a benchmark for evaluating expected investment performance.
b. The SML leads all investors to invest in the same portfolio of risky assets.
c. The SML is a graphic representation of the relationship between expected return and beta.
d. Properly valued assets plot exactly on the SML.
The market price of a security is $40. Its expected rate of return is 13%. The risk-free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity.
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