Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market return Aggressive Stock Defensive Stock 7% 4% 2.5% 25 38 16 What is the expected rate of return on each stock if the market return is equally likely to be 7% or 25%?

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market return Aggressive Stock Defensive Stock 7% 4% 2.5% 25 38 16 What is the expected rate of return on each stock if the market return is equally likely to be 7% or 25%?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1P

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An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return Aggressive Stock -4% 38 6% 24 Aggressive stock Defensive stock a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Beta Aggressive stock Defensive stock Defensive Stock b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 6% or 24%? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Expected Rate of Return 5% 13 % %
Consider the following information about two stocks (D and E) and two common risk factors (factor 1 and factor 2) Stock Risk factor 1 Risk factor 2 Expected return (%) D 1.2 3.4 13.1 2.6 2.6 15.4 a. Assuming that the risk free rate is 5%, determine the risk premium for factors 1 and 2 that are consistent with the expected returns for the two stocks. You expect that in one year the prices of Stock D and E will be $55 and $36 respectively and pay no dividends. What should be the price of each stock today to be consistent with the expected return levels. b. C. Determine how to you identified if Stock D and E are overvalued, fairly valued and undervalued? d. Suppose the risk premium for factor 1 as computed in (a) increases by 0.25 percent, what will be the new expected return for D and E? e. Suppose the risk premium for factor 1 as computed in (a) decreases by 0.25%, what will be the new expected return for D and E? f. Devise how would you develop a Jensen Index using Arbitrage Pricing…
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market return Aggressive stock Defensive stock -2% 5% 6% 25% 38% 12% (a) What are the betas of the two stocks? (b) What is the expected rate of return on each stock if the two scenarios for the market return are equally likely?
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market return Aggressive Stock Defensive Stock 7% 4% 2.5% 25 38 16 If the T-bill rate is 3% and the market return is equally likely to be 7% or 25%, what are the alphas of the two stocks?
Which one of the following stocks is correctly priced if the risk-free rate of return is 4.1 percent and the market risk premium is 8.6 percent? Stock Beta Expected Return A .81 7.88% B 1.57 12.69 C 1.38 11.35 D 1.37 11.99 E .95 12.27
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 7% 23 Aggressive Stock -4% 37 Defensive Stock Hurdle rate 4% Required: a. What are the betas of the two stocks? 11 b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 7% or 23% ? Also, assume a T-Bill rate of 4%. Complete this question by entering your answers in the tabs below. Required A Required B What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 7% or 23% ? Also, assume a T-Bill rate of 4%. Note: Do not round intermediate…
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Assume that you are given the following partial covariance and correlation matrices for Securities J, K and the Market. Also assume that the expected risk-free rate for the coming year is 3.0 percent and that the expected risk premium on the market is 7.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. J Market Correlation J K Market Covariance J K Market Standard Deviation O 18.48% O 20.20% O 15.48% O 12.71% O 15.04% 0.44 0.86 J 0.014400 J K 0.64 K CAN 0.016900 K 1.00 Market 0.003600 Market
You have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 -12 % 0.2 4 % 0.1 11 0.2 7 0.3 14 0.3 11 0.3 30 0.2 17 0.2 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place.Stock X: % Stock Y: % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places.Stock X: % Stock Y: % Which stock would you consider to be riskier? is riskier because it has a standard deviation of returns.
he table below shows information for 3 stocks. Security Beta Risk-free rate Expected market return Stock 1 1.9 0.02 0.09 Stock 2 1.2 0.035 0.09 Stock 3 0.2 0.015 0.09 The risk-free rates are different because they were measured in different years. Calculate the expected (or required) return for each stock, using the Capital Asset Pricing Model (CAPM). What is the required return for stock 1? What is the required return for stock 2? What is the required return for stock 3?