You have been provided the following data on the securities of three firms, the market portfolio, and
Question:
You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset:
a. Fill in the missing values in the table.
b. Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?
Expected Standard Security Return Deviation Correlation* Beta Firm A .11 .36 (i) .97 Firm B .14 (ii) .38 1.24 Firm C .13 .42 .41 (ii) The market portfolio .12 .19 (iv) (v) The risk-free asset .03 (vi) (vii) (vii)
Step by Step Answer:
a i Using the equation to calculate beta we find A AM A M 97 AM 3619 IM 51 ii Using the equation to ...View the full answer
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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