a. Calculate the required return for each stock. (Do not round Intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Stock Required Return % Furhman Labs Garten Testing b. Is each stock undervalued, fairly valued, or overvalued?
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- Wilson is now evaluating the expected performance of two common stocks, Furhman Labs Inc. and Garten Testing Inc. He has gathered the following information:∙ The risk-free rate is 5%.∙ The expected return on the market portfolio is 11.5%.∙ The beta of Furhman stock is 1.5.∙ The beta of Garten stock is .8.Based on his own analysis, Wilson’s forecasts of the returns on the two stocks are 13.25% for Furhman stock and 11.25% for Garten stock. Calculate the required rate of return for Furhman Labs stock and for Garten Testing stock. Indicate whether each stock is undervalued, fairly valued, or overvalued.Michael, an analyst at Kitsch Partners (KP), models the stock of the company. Suppose that the risk-free rate rRFrRF = 6.5%, the required market return rMrM = 12.5%, the risk premium for small stocks rSMBrSMB = 3.2%, and the risk premium for value stocks rHMLrHML = 4.8%. Suppose also that Michael ran the regression for Kitsch Partners’s stock and estimated the following regression coefficients: aKPaKP = 0.00, bKPbKP = 0.9, cKPcKP = 0.2, and dKPdKP = 0.3. If Michael uses a Fama-French three-factor model, then which of the following values correctly reflects the stock’s required return? 3.18% 17.94% 7.48% 13.98%Barry wishes to compute the beta of a stock that has a correlation of 0.64 with the market. The following data is available: Standard Deviation of Returns of Stock = 14.1%. Standard Deviation of Returns of Market = 9.44%. 1) Calculate the beta of the stock 2) If the risk free rate is estimated to be 3%, market return 9% and given the beta that you calculated in question 1, what is the expected return of the stock? 3) If the actual return next year turned out to be 10% what is the Jensen's alpha? Is Barry, the investor happy or disappointed? 4) Using data for the stock presented and/or calculated above, what is the Sharpe ratio? When is this measurement appropriate? 5) Using data for the stock presented and/or calculated above, what is Treynor measure? When is this measurement appropriate?
- Colin observed that the standard deviation of the return on the market index is estimated as 9.14%. If Target Corporation (TGT)’s standard deviation is 6.71% and its correlation of returns with the market index is 0.29, TGT’s beta is closest toAn analyst collected the following data for three possible investments. The expected return on the market is 12% and the risk-free rate is 4%. According to the security market line (SML), which of the three securities is correctly priced? 1)Alpha Stock : Price Today : 25 Forecast price : 31 Dividend : 2 Beta : 1.6 2)Omega Stock : Price Today : 105 Forecast price : 110 Dividend : 1 Beta : 1.2 3)Lambda Stock : Price Today : 10 Forecast price : 10.8 Dividend : 0 Beta : 0.5Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15% and 35%; and of Poker-R-Us are 9 percent and 20 percent. Before solving this problem, calculate the coefficient of variation.
- Nishikori is now evaluating the expected performance of 2 common stocks. AOA Labs Inc and YLC Inc. He has gathered the following information: The risk-free rate is 4% The expected return on the market portfolio is 12% The beta of AOA Labs Inc stock is 1.7 The beta of YLC Inc stock is 0.7 Based on his own analysis, Nishikori’s forecasts of the returns on the stocks are 13.5% for AOA Labs Inc and 11% for YLC Inc stock. Calculate the required rate of return for AOA Labs Inc stock and YLC Inc stock. Which investment is better?Capitial Investment hired a new analyst Jack Lee to evaluate a portfolio consisting of two stocks, Meta Platforms Inc (FB) and Walmart Inc (WMT), After exercising due diligence, Jack forecasts FB stock has an expected return of 15% and standard deviation of 25%, while WMT stock has an expected return of 10% and standard deviation of 20%., The correlation coefficient between stock returns of FB amd WMT is 0.4 and risk-free rate is 3%. If Jack is asked to design a optimal portfolio based on the above forecast, the proportion of the optimal risky portfolio that should be invested in WMT stock is O 52.3% O 36.7% O 63.3% 47.7%Compute the expected rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 3.5 percent and the market portfolio has an expected return of 16 percent. Referring to above answer, why is the rate you computed the expected rate? Logan Morgan is considering an investment in one of two portfolios. Given the information that follows, which investment is better, based on risk (as measured by standard deviation) and the expected rate of return? Portfolio A Portfolio B Probability Return Probability Return .20 -2% .10 5% .50 19% .30 7% .30 25% .40 12% .20 14%
- Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 12 percent and standard deviation of 32 percent. The average return and standard deviation of WholeMart are 11 percent and 25 percent; and of Fruit Fly are 16 percent and 40 percent.Stock A has an expected return of 9%, while the market portfolio has an expected return of 6.36%. Stock A has variance 2.56 %, and the risk-free rate is 1%. You are a financial advisor and try to assess quantitatively the risk aversion of one of your clients, giving her a questionnaire about risk-return preferences. From her answers, you conclude that her risk-aversion coefficient is 4. a. Derive the condition under which you could claim that the CAPM holds. b. Derive the condition under which your client would be indifferent between investing her wealth either in the riskless asset or in the market. c) Your client also asks you to show her an alternative portfolio created by mixing the riskless asset with stock A. In this case, which weights would you suggest?The stock of Jones Trucking is expected to return 16 percent annually with a standard deviation of 7 percent. The stock of Bush Steel Mills is expected to return 21 percent annually with a standard deviation of 13 percent. The correlation between the returns from the two securities has been estimated to be +0.4. The beta of the Jones stock is 1.1, and the beta of the Bush stock is 1.4. The risk-free rate of return is expected to be 6 percent, and the expected return on the market portfolio is 16 percent. The current dividend for Jones is $5. The current dividend for Bush is $7. What is the expected return from a portfolio containing the two securities if 30 percent of your wealth is invested in Jones and 70 percent is invested in Bush? Round your answer to one decimal place. % What is the expected standard deviation of the portfolio of the two stocks? Round your answer to two decimal places. % Which stock is the better buy in the current market? Round your answers to one decimal…