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Chap_12_-_Review_Questions

# Chap_12_-_Review_Questions - Solutions of selected review...

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Solutions of selected review problems from Chap.12 12.2 a. Let m = systematic risk portion of return: 1 1 2 2 3 3 .0042(4,480 4,416) 1.4(4.3% 3.1% 0.67(11.8% 9.5%) 0.23659 m F F F m m β β β = + + = - - - - - = b. Let ε = the unsystematic portion of risk, since the news was only about this firm: 2.6% ε = - c. Total Return = Expected return, plus 2 the components of unexpected return: the systematic risk portion of return and the unsystematic portion: 9.5% 23.659% 2.6% 30.559% R R m ε = + + = + - = 12.5 a. Since five stocks have the same expected returns and the same betas, the portfolio also has the same expected return and beta. However, the unsystematic risks might be different: ( 29 1 2 1 2 3 4 5 1 11.0 0.84 1.69 5 p R F F ε ε ε ε ε = + + + + + + + b. ( 29 ( 29 1 2 1 2 3 4 5 j 1 2 3 4 5 1 2 1 11.0 0.84 1.69 5 1 1 N , 0, but are finite, so 0 N Thus, 11.0 0.84 1.69 p p R F F As s N R F F ε ε ε ε ε ε ε ε ε ε ε = + + + + + + + → ∞ + + + + = + + 12.7 a. In order to find standard deviation (notated here, s ), you must first find the Variance, since s Var = . Recall from Statistics a property of Variance: if: Z aX Y = + % % % Answers to End-of-Chapter Problems B-175

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