Why risk premium of stock does not depend diversifiable risk

Assignment Help Financial Management
Reference no: EM13883281

Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak. A type S firm has excess returns that increase by 45% when the economy is strong and decrease by 30% when the economy is weak. A type I firm will also have excess returns of either 45% or -30%, but the type I firm's excess returns will depend only upon firm-specific events and will be completely independent of the state of the economy.

What is the Beta for a type S firm?

a. 1.5

b. 0.0

c. 1.0

d. 0.75

Problems:

1. What is an efficient portfolio?

2. Explain why the risk premium of a stock does not depend on its diversifiable risk.

Reference no: EM13883281

Questions Cloud

Securities excess returns versus the market excess return : Securities whose returns tend to move in tandem with the market on average have a beta of 1. Securities that tend to move more than the market have betas higher than 0. Beta corresponds to the slope of the best fitting line in the plot of the securit..
Assume that the yield to maturity remains : A bond has a $1,000 par value, 14 years to maturity, and a 6% semi annual coupon and sells for $975. Assume that the yield to maturity remains at 6.27% for the next 2 years. What will the price be 2 years from today?
Maturity risk premium-the real risk-free rate : MATURITY RISK PREMIUM The real risk-free rate is 3.4%, and inflation is expected to be 3.8% for the next 2 years. A 2-year Treasury security yields 7.8%. What is the maturity risk premium for the 2-year security? Round to ONE decimal place.
Equity carve-outs and initial public offerings : Differentiate between equity carve-outs and initial public offerings. What do research studies show about the shareholder wealth effects of each?
Why risk premium of stock does not depend diversifiable risk : Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak. What is the Beta for a type S firm? What is an efficient portfolio? Explain why the risk premium of a stock ..
What are the lenders legal obligations : What is the loan to value ratio and explain how applying for a ‘Low Doc Loan' could lead the mortgage broker.
Create a realistic job preview for the potential applicants : Create a realistic job preview for the potential applicants for this job using the Job Requirement Matrix and Job Rewards Matrix developed in task 1
What is the bonds current market price : BOND VALUATION Callaghan Motors' bonds have 13 years remaining to maturity. Interest is paid semi annually, they have a $1,000 par value, the coupon interest rate is 5%, and the yield to maturity is 6%. What is the bond's current market price?
Considering the acquisition of production equipment : A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $100,000 and it will be depreciated on a straight-line basis down to $0. The firm’s tax rate is 35 percent and the required..

Reviews

Write a Review

Financial Management Questions & Answers

  Calculate the accounting break-even point

We are evaluating a project that costs $1,160,000, has a ten-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Calculate the accounting break-even point. What is the degree of operati..

  Debt-to-total-assets ratios and interest rates on debt

Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 perc..

  Calculate the holding period return on a before-tax basis

Mary and Nick Stalcheck have an investment portfolio containing 4 investments. It was developed to provide them with a balance between current income and capital appreciation. Calculate the holding period return on a before-tax basis for each of thes..

  Whats the value of share of firm

What’s the value of a share of a firm that is promised to pay a constant dividend of $3 per share forever, starting from a year from now, assuming the required rate of return is 8%?

  Prepare an amortization schedule

Prepare an amortization schedule for a five-year loan of $67,500. The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much interest paid in the third year ? How much total interest is paid over the life of the l..

  What percentage of principal is paid off-mortgage balance

You purchase a house that costs $625,000 with a 8%, 30-year mortgage. In order to avoid PMI insurance, you decide to follow a conforming mortgage by making a down payment of 20%. 1. What is your monthly payment? 2. Amortize the first and second payme..

  How many months will it be before he pays off the card

Paying off credit cards Simon recently received a credit card with an 13% nominal interest rate. With the card, he purchased an Apple iPhone 5 for $400. The minimum payment on the card is only $10 per month. If Simon makes the minimum monthly payment..

  Require an effective annual interest rate

You are considering a 20-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semi-annually. If you require an "effective" annual interest rate (not a nominal rate) of 10.59%, how much should you be willing to pay for the bond? Do..

  Between annual sales of bobcat industries

Between December 31, 2016 and December 31, 2017, annual sales of Bobcat Industries went from $32,000,000 to $48,000,000. EBIT went from $3,000,000 to $4,600,000. Net income went from $1,500,000 to $2,200,000. Management has asked you to comment

  Piece of newly purchased industrial equipment costs

A piece of newly purchased industrial equipment costs $978,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual depreciation allowances and end-of-the-year book values ..

  Calculate the depreciation expense

You are given the following information for Calvani Pizza Co.: sales = $45,000; costs = $21,500; addition to retained earnings = $8,750; dividends paid = $1,000; interest expense = $5,500; tax rate = 35 percent. Calculate the depreciation expense.

  Calculate NPV and MIRR of pulley project

When considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,400, and that for the pulley system is $20,200.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd