You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend 22 24 48 51 37 UND 40 0.75 2.00 1.25 Plot your estimated returns on the graph from Part a and indicate what actions you would take with regard to these stocks. Explain your decisions.

You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend 22 24 48 51 37 UND 40 0.75 2.00 1.25 Plot your estimated returns on the graph from Part a and indicate what actions you would take with regard to these stocks. Explain your decisions.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4P: An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

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You ask a stockbroker what the firm’s research department expects for the three (3) stocksabove, that is, Stock X, Y and Z. The broker responds with the following information:Stock Current Price Expected Price Expected Dividend X 22 24 0.75 Y 48 51 2.00 Z 37 40 1.25Required:B. Calculate the estimated future rate of return for Stock X, Y, and Z. C. Determine which stock is overvalued, undervalued, properly valued, and state whyD. Illustrate with the use of the Security Market Line (SML) how Stock X , Y and Z wouldappear on it.
a. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph. Stock Beta E(Ri) U 0.85 N 1.25 D -0.2 b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U 22 24 0.75 N 48 51 2 D 37 40 1.25 Plot your estimated returns on the graph from part (a) and indicate what actions you would take with regard to these stocks. Explain your decisions.
b) Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Expected Return (%) 11% Stock Beta A 0.8 В 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results.
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.25 0,50 0.25 Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a apreadsheet) Common Stock B Return 10% 17% 18% Return -4% 7% 13% 20% G a. Given the information in the table, the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is (Round to two decimal places.)
1. If a stock has a(Alpha)=0.002, b(Beta)=1.4, Using the market model (eq. 7.4), find the expected percent return for the above stock if the market return is expected to be 2% and the risk free rate is 1%. 2. Assume stock prices follow a random walk and a particular stock has had the following recent stock prices: Day 1: 129.5 Day 2: 126.9 Day 3: 127.1 what is the best estimate of day 4 prices?
(Expected rate of return and risk) Syntex, Inc is considering an investment in one of two common stocks Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and retum? Common Stock A Probability 0.25 0,50 0:25 Common Stock B Return 10% 17% 10% Probability 0.10 0:40 0:40 010 (Click on the soon in order to copy its contents into a spreadsheet) Return -6% 8% 15% 20% COD a. Given the information in the table the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is 4 36% (Round to two decimal places)
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) Common Stock B Return 13% 14% 18% Return - 6% 7% 15% 21% a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.)
The rate of return on the market stock index is 13 percent. The rate of return on a risk-freebank account is 1%. The B (beta) of stock XYZ is 1.5. Use the data to answer the questionsbelow.a. What is the market risk premium? Show your work.b. What is the cost of equity for XYZ? Show your work.c. What is the stock XYZ risk premium? Show your work.d. Draw the graph of the Security Market Line and show the stock of XYZ on the graph.The end-of-year dividend on stock ABC is expected to be $0.8. The growth rate of dividend isexpected to be 5 percent for ever. The current price of the ABC stock is $10. Use the data toanswer the questions below.e. What is the cost of equity for stock ABC? Show your work.f. Suppose stock KLM has the same end-of-year dividend, dividend growth rate andprice as stock ABC, but the risk of KLM stock is much greater than of the ABC stock.What is your estimate of the cost of equity of stock KLM using the method at part e?Do you agree with the valuation of the cost of…
K (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Common Stock B Return 13% 17% 18% Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a spreadsheet.) Return -7% 5% 16% 21% www a. Given the information in the table, the expected rate of return for stock A is 16.40 %. (Round to two decimal places.) The standard deviation of stock A is 1.74 %. (Round to two decimal places.) b. The expected rate of return for stock B is 9.8 %. (Round to two decimal places.) The standard deviation for stock B is 6.12 %. (Round to two decimal places.)
Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's Stock CAPM Elements Value Risk-free rate (rRFrRF) Market risk premium (RPMRPM) Happy Corp. stock’s beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.’s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst’s prediction. Happy Corp.’s new required rate of return is . Tool tip: Mouse over the points on…
You are trying to decide whether to invest in one or both of two different stocks. The marketrisk premium and risk-free rate are 6 percent and 4 percent respectively.Beta Expected Return(%)Stock 1 beta 0.8 % expected return7.0Stock 2 beta 1.2 %expected return 9.5Use your knowledge of the CAPM and the SML which and determinewhether you should invest in either, one, or both of these stocks. Provide all workings