Consider the following information about two stocks (D and E) and two common risk factors (1 and 2): Stock D E Bu 1.2 2.6 Ba 3.4 2.6 E(R.) 13.1% 15.4% Assuming that the risk-free rate is 5%, calculate the levels of the factor risk-premium that are consistent with the reported values for the factor betas and the expected returns for the two stocks. You expect that in one year the prices of for D and E will be $55 and $36. 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 levels in the table above? Suppose that the risk-premium for Factor I that you calculated at point a) suddenly increases by 0.25%, i.e., from x% to (x+0.25)%, where x is the value established at a). What are the new expected returns for D and E? If the increase in the Factor 1 risk-premium in c) does not cause a change in opinion about what the stock prices will be in one year, how will the current prices adjust today?

Consider the following information about two stocks (D and E) and two common risk factors (1 and 2): Stock D E Bu 1.2 2.6 Ba 3.4 2.6 E(R.) 13.1% 15.4% Assuming that the risk-free rate is 5%, calculate the levels of the factor risk-premium that are consistent with the reported values for the factor betas and the expected returns for the two stocks. You expect that in one year the prices of for D and E will be $55 and $36. 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 levels in the table above? Suppose that the risk-premium for Factor I that you calculated at point a) suddenly increases by 0.25%, i.e., from x% to (x+0.25)%, where x is the value established at a). What are the new expected returns for D and E? If the increase in the Factor 1 risk-premium in c) does not cause a change in opinion about what the stock prices will be in one year, how will the current prices adjust today?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 21P

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