Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot.Required:What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. (Answer for Intel is not 7.87%) FIGURE 12.11 Monthly ratesof return for (a) Marathon Oil,(b) Intel, and (c) Walmart, plus themarket portfolio.FIGURE 12.11 (continued)(a)Marathon Oil retum (%)(b)Intel return (%)-10%-10%(C)Walmart return (%)10%- 5%40%-5%30%20%10%0%.-20%-5%10%-30%Market return (%)30%25%20% +15%10%• 5%-10%-15%30% T25%20% +15% +10% +5% to. 5%• Beta = 2.35-20%Market return (%)**0%Std dev = 48.4%5%+9%-5%-10% +-15%-20%Market return (%)Beta = .91Std dev = 21.9%10%5%10%110%Beta = .35Std dev = 17.5%

Formula:- expected rate of return on stock can be calculated using capital asset pricing model.…

Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot. Required: What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. (Answer for Intel is not 7.87%)

Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot. Required: What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. (Answer for Intel is not 7.87%)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 23P

See similar textbooks

Required:

What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%. (Answer for Intel is not 7.87%)

FIGURE 12.11 Monthly rates
of return for (a) Marathon Oil,
(b) Intel, and (c) Walmart, plus the
market portfolio.
FIGURE 12.11 (continued)
(a)
Marathon Oil retum (%)
(b)
Intel return (%)
-10%
-10%
(C)
Walmart return (%)
10%
- 5%
40%
-5%
30%
20%
10%
0%
.-20%
-5%
10%
-30%
Market return (%)
30%
25%
20% +
15%
10%
• 5%
-10%
-15%
30% T
25%
20% +
15% +
10% +
5% to
. 5%
• Beta = 2.35
-20%
Market return (%)
**
0%
Std dev = 48.4%
5%
+9%
-5%
-10% +
-15%
-20%
Market return (%)
Beta = .91
Std dev = 21.9%
10%
5%
10%
1
10%
Beta = .35
Std dev = 17.5%

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

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