Consider the following information about two stocks (D and E) and two common risk factors (1 and 2) Stock b ba 31 2.1 13.90% E(R) 14.45% 16 2.1 levels of the factor risk premia that are consistent with the reported values for t a. Assuming that the risk-free rate is 5.5%, calculate t your answers to one decimal place Au Aj b. You expect that in one year the prices for Stocks D will be $51 and $39, respectively Aso, neither stack today to be consistent with the expected return levels listed at the beginning of the problem? Round your answers to the nearest cent Today's price for Stock D: beras and the expected returns Expected retum for Stock E d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your opinion about what the stock prices today's) prices? Oo not round intermediate calculations. Round your anser nearest cent Today's price for Stock O: $ Today's price for Stock E dividend over the next year. What should the stocks Round Today's price for Stock E Suppose now that the premium for Factor 1 that you calculated in Part a suddenly increases by 0.35% 0, from a to (0.35%, where is the value established in Part . What are the new expected returns for Stocks D and E7 Round your a to two decimal places Expected retur Stick D one year what adjustment will be each stock be the current de
Consider the following information about two stocks (D and E) and two common risk factors (1 and 2) Stock b ba 31 2.1 13.90% E(R) 14.45% 16 2.1 levels of the factor risk premia that are consistent with the reported values for t a. Assuming that the risk-free rate is 5.5%, calculate t your answers to one decimal place Au Aj b. You expect that in one year the prices for Stocks D will be $51 and $39, respectively Aso, neither stack today to be consistent with the expected return levels listed at the beginning of the problem? Round your answers to the nearest cent Today's price for Stock D: beras and the expected returns Expected retum for Stock E d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your opinion about what the stock prices today's) prices? Oo not round intermediate calculations. Round your anser nearest cent Today's price for Stock O: $ Today's price for Stock E dividend over the next year. What should the stocks Round Today's price for Stock E Suppose now that the premium for Factor 1 that you calculated in Part a suddenly increases by 0.35% 0, from a to (0.35%, where is the value established in Part . What are the new expected returns for Stocks D and E7 Round your a to two decimal places Expected retur Stick D one year what adjustment will be each stock be the current de
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 6P
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Transcribed Image Text:Consider the following information about two stocks (D and E) and two common risk factors (1 and 2)
ba
1.6
2.1
Stock
D
E
ba E(R.)
3.1 14.45%
2.1 13.90%
a. Assuming that the risk-free rate is 5.5%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks. Round
your answers to one decimal place
Axt
Ax
b. You expect that in one year the prices for Stocks D and I will be $51 and $39, respectively. Also, neither stock is expected to pay a dividend over the next year. What should the price of each stock be
today to be consistent with the expected return levets listed at the beginning of the problem? Round your answers to the nearest cent.
Today's price for Stock D:
Today's price for Stock E: S
Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly increases by 0.33% 0e, from x to (-0.35%, where is the value established in Part . What are the new
expected returns for Stocks D and E) Round your answers to two decimal places.
Expected return for Stock D
Expected return for Stock E
d. If the increase in the factor 1 risk premium in Parte does not cause you to change your opinion about what the stock prices will be in one year, what aquatment will be necessary in the current ,
today's) prices? Do not round intermediate calculations. Round your answers to the nearest cent
Today's price for Stock D: 5
Today's price for Stack E: $
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