Chapter 2: Q3B. (page 141)
When estimating a Sharpe ratio, would it make sense to use the average excess real return that accounts for inflation?
No. The input should use nominal data and not use average excess real return data.
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Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:
a. An abnormal price change at the announcement.
b. An abnormal price increase before the announcement.
c. An abnormal price decrease after the announcement.
d. No abnormal price change before or after the announcement.
You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars):
| YEARS FROM NOW | After-Tax CF |
| 0 1-9 10 | -20 10 20 |
The project’s beta is 1.7. Assuming r f = 9% and E ( r M ) = 19%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
Assume both portfolios A and B are well diversified, that E ( r A ) = 14% and E ( r B ) = 14.8%. If the economy has only one factor, andβA= 1 whileβB = 1.1, what must be the risk-free rate?
According to the efficient market hypothesis:
a. High-beta stocks are consistently overpriced.
b. Low-beta stocks are consistently overpriced.
c. Positive alphas on stocks will quickly disappear.
d. Negative-alpha stocks consistently yield low returns for arbitrageurs
Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. Value usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.
a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.
b. Explain why the outcome suggested in ( a ) should not be possible in a market widely regarded as being highly efficient.
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