Suppose that you have estimated the CAPM betas for the equity shares of the following two firms: Levi Strauss & Co. ( NYSE: LEVI): \beta ^LEVI = 1.10 Tesla Inc. (Nasdaq: TSLA):\beta ^ TSLA = 1.90 Assume that the risk - free rate is estimated at 4%, stable over the entire CAPM estimation period, and will remain in the foreseeable future. Answer questions a) and b) below. (Lecture notes p.12, pp.15-17) Suppose the expected return on S&P 500 index, a proxy for the market portfolio, is estimated at 17%. Find the CAPM required returns on equity shares of Levi's and Tesla, respectively. Answer (show the steps/calculation toward your results): Suppose the market risk premium is estimated at 9%. Find the CAPM required returns on equity shares of Levi's and Tesla, respectively. Answer (show the steps/calculation toward your results):

Suppose that you have estimated the CAPM betas for the equity shares of the following two firms: Levi Strauss & Co. ( NYSE: LEVI): \beta ^LEVI = 1.10 Tesla Inc. (Nasdaq: TSLA):\beta ^ TSLA = 1.90 Assume that the risk - free rate is estimated at 4%, stable over the entire CAPM estimation period, and will remain in the foreseeable future. Answer questions a) and b) below. (Lecture notes p.12, pp.15-17) Suppose the expected return on S&P 500 index, a proxy for the market portfolio, is estimated at 17%. Find the CAPM required returns on equity shares of Levi's and Tesla, respectively. Answer (show the steps/calculation toward your results): Suppose the market risk premium is estimated at 9%. Find the CAPM required returns on equity shares of Levi's and Tesla, respectively. Answer (show the steps/calculation toward your results):

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%
What is the solution and the working
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.0% 5.0% 2 0.5 20 32 15 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A : Beta D: b. What is the expected rate of return on each stock? (Round your answers to 2 decimal places.) % Rate of Return on A: % Rate of Return on B:
In an economy where the risk-free interest rate is 19% and the expected return of the market is 25%, the beta coefficients of A, B, C and D stocks and the expected returns announced by the companies are as follows. According to the Financial (Capital) Assets Pricing Model c) Calculate the expected return rates of the shares.d) Determine which stocks can be invested by comparing the expected return announced by the company with the expected return you calculated.
Suppose you observe the following situation: Security Ruby Pearl Expected Return 14.9% 21.0% Beta 0.70 2.13 A). If these two securities are correctly priced, calculate the risk-free rate. Round your answer to 4 decimal points. B). If these two securities are correctly priced, find the market risk premium (using the findings of Requirement-A). Round your answer to 4 decimal points. C). If the current market data shows that the risk-free rate is 3.52 percent, are these securities fairly priced? Comment on your answer. Round your answers to 4 decimal points. D). Calculate the expected return and beta of an equally weighted portfolio of these two securities. Round your answers to 3 decimal points.
a. Calculate the change in retur Security A's change in return w Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security A BC Print Beta 1.63 0.62 -0.24 ---n Done X iod.
Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data, calculate the expected return of investing in a. Starbucks’ stock-Equity Beta:0.80b. Hershey’s stock-Equity Beta:0.33c. Autodesk’s stock-Equity Beta:1.72
1
← You are thinking of buying a stock priced at $109.31 per share. Assume that the risk-free rate is about 4.03% and the market risk premium is 6.48%. If you think the stock will rise to $118.76 per share by the end of the year, at which time it will pay a $3.48 dividend, what beta would it need to have for this expectation to be consistent with the CAPM? The beta is (Round to two decimal places.) ...
You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9% Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]
A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -
Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.

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