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

  What was the firms operating profit

Lurch Fuel Pumps, Inc. had sales of $2,500,000 and cost of goods sold of $1,710,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,680,000. What was the firm’s operating prof..

  Difference between normal goods and inferior goods

Discuss the difference between substitutes and complements and the difference between normal goods and inferior goods. How do managers and business owners use these concepts? Please provide real world examples.

  Determine the present value of replacing the fleet

Adams County has 80 older model school buses that carry a present salvage value of $15,000 each. The county officials are contemplating replacing all the buses with 70 new larger ones, each costing $115,000. Determine the Present Value of replacing t..

  What is the highest rate you can afford on apr loan

You want to borrow $87,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,550, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 72-month APR loan?

  What ear is the bank is charging

What EAR (effective annual rate) is the bank is charging? What if they change compounding to bi-monthly?

  Companys cost of equity capital

The Zombie Corporation’s common stock has a beta of 1.1. If the risk-free rate is 5.1 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital?

  Calculate the call value of owens corning warrants

When Owens Corning emerged from bankruptcy in 2006, the debt holders became the sole owners of the company. But the old stockholders were not left entirely empty handed. They were given warrants to buy the new common stock at any point in the next se..

  Define classes of shares with unequal rights

When comparing common stock of the same company it is fair to say that all shares, no matter how many classes, are all created with the same equal rights. companies sometimes have two different classes of shares with unequal rights to dividends an..

  Valuing preferred stock

E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should..

  About the mutual fund

Super Growth Fund had $250 million assets at the start of the year with 10 million shares outstanding. It also had $10 million in liabilities. By the end of the year, Super Growth Fund has grown its assets to $500 million and paid off all liabilities..

  Unbiased predictor of future exchange rates

Provide proof and please be specific about required conditions on relations between financial variable(s) such as of both countries.

  Estimate its optimal capital structure

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk p..

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