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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

Finance

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:

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