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Homework answers / question archive / 12 (i) A stock with a beta of 1

12 (i)

A stock with a beta of 1.8 has an expected rate of return of 16%. If the market return this year turns out to be 6 percentage points below expectations, what is your best guess as to the rate of return on the stock? **(Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)**

Stock Return: %

(ii)

The risk-free rate is 6% and the expected rate of return on the market portfolio is 10%.

**a.** Calculate the required rate of return on a security with a beta of 1.24. **(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)**

Required Return:

(iii)

A share of stock with a beta of 0.78 now sells for $53. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 5%, and the market risk premium is 8%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year?** (Do not round intermediate calculations. Round your answer to 2 decimal places.)**

Stock Price:

(iiii)

A share of stock with a beta of 0.79 now sells for $61. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 6%, and the market risk premium is 9%.

**a.** Suppose investors believe the stock will sell for $63 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do? **(Do not round intermediate calculations. Round your opportunity cost of capital calculation as a percentage rounded to 2 decimal places.)**

opportunity cost of capital:

The stock is......nuy and investors....

**b.** At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? **(Do not round intermediate calculations. Round your answer to 2 decimal places.)**

Stock Price:

(iiiii)

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −0.1.

**a. **If the interest rate on Treasury bills is 5% and the expected return on the market portfolio is 15%, what is the expected return on the shares of the law firm according to the CAPM? **(Enter your answer as a whole percent.)**

Expected Return: %

**b. **Suppose you invested 80% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? **(Do not round intermediate calculations. Round your answer to 2 decimal places.)**

Beta: