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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 13

RETURN, RISK, AND THE SECURITY MARKET LINE - all with Video Answers

Educators

Chapter Questions

00:37

Problem 1

In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Achintya Suden
Achintya Suden
Numerade Educator
01:47

Problem 1

Given that Fannie Mae was up by about 1,333 percent for 2013 , why didn't all investors hold this stock?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
02:28

Problem 2

uppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, as compared to 5 percent for the past year. Will security prices increase, decrease, or stay the same following this announcement? Does it make any difference whether the 2 percent figure was anticipated by the market? Explain.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
04:36

Problem 3

Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case?
a. Short-term interest rates increase unexpectedly.
b. The interest rate a company pays on its short-term debt borrowing is increased by its bank.
c. Oil prices unexpectedly decline.
d. An oil tanker ruptures, creating a large oil spill.
e. A manufacturer loses a multimilliondollar product liability suit.
f. A Supreme Court decision substantially broadens producer liability for injuries suffered by product users.

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
01:37

Problem 4

Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.'s stock to change price:
a. The government announces that inflation unexpectedly jumped by 2 percent last month.
b. Big Widget's quarterly earnings report, just issued, generally fell in line with analysts' expectations.
c. The government reports that economic growth last year was at 3 percent, which generally agreed with most economists' forecasts.
d. The directors of Big Widget die in a plane Page 451 crash.
e. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. The legislation had been debated for the previous six months.

Doris Bennett
Doris Bennett
Numerade Educator
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Problem 5

If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these questions, give an example to support your answer.

James Kiss
James Kiss
Numerade Educator
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Problem 6

The most important characteristic in determining the expected return of a well-diversified portfolio is the variance of the individual assets in the portfolio. Explain.

James Kiss
James Kiss
Numerade Educator
01:50

Problem 7

If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?

Narayan Hari
Narayan Hari
Numerade Educator

Problem 8

Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer?

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04:12

Problem 9

In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of massive layoffs. Critics charge that such events encourage companies to fire longtime employees and that Wall Street is cheering them on. Do you agree or disagree?

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 10

As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second, these announcements concern accounting earnings. Going back to Chapter 2 , such earnings may have little to do with cash flow-so, again, why are they relevant?

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