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Chapter 16 Solutions

# Chapter 16 Solutions - Chapter 16 Solutions 1 a Stock A...

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Chapter 16 Solutions 10. a0. Stock A Stock B Stock C Market increase .12 x 0.8 0.096 .12 x 1.7 0.204 .12 x 2.5 0.30 Beta Percentage increase Beginning value \$ 2000 x 1.096 \$ 2192 \$ 2000 x 1.204 \$ 2408 \$ 2000 x 1.30 \$ 2600 1+ percent increase Likely value b0. Stock A Stock B Stock C Market increase .19 x 0.8 0.152 .19 x 1.7 0.323 .19 x 2.5 0.475 Beta Percentage increase Beginning value \$ 2000 x 1.152 \$ 2304 \$ 2000 x 1.323 \$ 2646 \$ 2000 x 1.475 \$ 2950 1+ percent increase Likely value c0. Stock A Stock B Stock C Market decrease .08 x 0.8 0.064 .08 x 1.7 0.136 .08 x 2.5 0.20 Beta Percentage decrease Beginning value \$ 2000 x .936 \$ 1872 \$ 2000 x .864 \$ 1728 \$ 2000 x .80 \$ 1600 1– percent decrease Likely value d0. The total portfolio value if the market climbed 12 percent would be \$7200, an increase of \$1200. It would be \$5200 if the market went down 8 percent, a decrease of \$800.

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The following table shows the portfolio values if the entire \$6000 had been invested in any single stock compared to the diversified portfolio: Diversified Portfolio Stock A Stock B Stock C Beginning value \$6000 \$6000 \$6000 \$6000 Value with 12 percent increase in market \$7200 \$6576 \$7224 \$7800 Value with 8 percent decrease \$5200 \$5616 \$5184 \$4800 Investing entirely in stock C produces the best results if the market goes up but the worst results if the market goes down. On the other hand, the entire investment in stock A produces the worst results if the market goes up. The diversified portfolio is
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