Chapter 7 Questions & Problems: 14, 15, 16
Chapter 11 Questions & Problems: 1, 2, 3, 4, 5
Chapter-11
1. Stock Market History. Use the data in Tables 11.1 and 11.4 to answer these questions: (LO11-1)
a. What was the average rate of return on large U.S. common stocks from 1900 to 2017?
b. What was the average risk premium on large stocks?
c. What was the standard deviation of returns on the market portfolio?
2. Maturity Premiums. Investments in long-term government bonds produced a negative average return during the period 1977–1981. How should we interpret this? Did bond investors in 1977 expect to earn a negative maturity premium? What do these 5 years of bond returns tell us about the normal future maturity premium? (LO11-1)
3. Risk Premiums. What will happen to the opportunity cost of capital if investors suddenly become especially conservative and less willing to bear investment risk? (LO11-1)
4. Risk Premium. If the stock market return next year turns out to be ?20%, will our estimate of the “normal” risk premium increase or decrease? Does this make sense? (LO11-1)
5. Risk Premiums and Discount Rates. Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. What price should she be willing to pay for the stock today? Assume that risk-free Treasury securities currently offer an interest rate of 2%. Use Table 11.1 to find a reasonable discount rate. (LO11-1)
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