Chapter 9 Problems

Brian Viscusi ( (no email) )
Mon, 17 Aug 1998 08:19:19 PDT

First, on page 225 of the text, they have made an error in their
percentage deduction for risk. They claim investors would be willing to
have a 5.4% lower cash flow if it were risk free. Their calculations
using 5.4% are all wrong, but do give the final correct answers. It
should be 100/1.057=94.6,100/(1.057^2)=89.6, & 100/(1.057^3)=84.8.
The 5.7% comes from (100-94.6)/94.6.
(I seem to be a bit behind everyone else on this list, but I thought I'd
point out this error any way, just in case).

Second, is anyone weoking on the questions and problems at the end of
the chapter? Or are most people skipping them because there are no
answers to check?
If you are going through these problems, please help me with a couple
questions on Chapter 9 (pg.232).
1b. Which stock had changes most closely related to the market?
I think it is either Mississippi Power Company because it has a
beta of .95( but an alpha of -.81) or Mitsui & Co. which has a beta of
..87 and an alpha much closer to 0 of -.13. If a company has the highest
% of market risk, are they most closely related to the market
(Mississippi Power Company has the highest market risk)
Any opinions on this question.
2. How do you determine the best forecast of alpha in this problem?

Any help on any of these problems would be greatly appreciated.

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