Chapters 12 and 13(1) - Math 3650 Spring 2016...

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Math 3650 Spring 2016 Practice/Review for Chapters 12-13 1. The risk free rate is 3% and the equity risk premium is 5%. Google has volatility of 26% and a Beta of 1.45 Southwest Airlines has a Beta of 0.83. Its’ total volatility is 40%. Which firm has greater risk? Which firm has the lower equity cost of capital? Explain. 2. If the beta of a stock decreases, what happens to its’ stock price? 3. The risk free rate is 5% and the equity risk premium is 8%. The price of a share of XYZ Corp stock (which pays no dividends) is expected to be $40 one year from now. The equity beta of XYZ Corp is between zero and one. What is the price range of a share of XYZ Corp stock today? 4. What is the alpha of a stock? According to the CAPM, if the market is completely efficient, what should the value of alpha be for any stock? 5. What is the difference between homogeneous expectations and rational expectations? ANSWERS 1. Southwest Airlines has higher total volatility, therefore higher risk.
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