BD_SM13 - Chapter 13 Alternative Models of Systematic Risk...

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Chapter 13 Alternative Models of Systematic Risk 13-1. The size effect is the empirical observation that firms with lower market capitalizations on average have higher average returns. 13-2. If returns are predictable it is possible to construct a positive alpha trading strategy. 13-3. Either the CAPM does not capture a risk factor investors care about, or investors are ignoring the opportunity to earn higher expected returns without taking on any extra risk. 13-4. You buy stocks that have done well in the past and sell stocks that have done poorly. 13-5. If the market portfolio is efficient, then all stocks have zero alphas, and you could not construct any strategy that has a positive alpha. 13-6. Firms with higher expected returns will have lower market values, and firms with high dividend yields will have high expected returns. 13-7. a. Firm Dividend Cost of Capital Market value S1 10 8% $125.00 S2 10 12% $83.33 S3 10 14% $71.43 B1 100 8% $1,250.00 B2 100 12% $833.33 B3 100 14% $714.29 b.
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