25. Two stocks, one high risk (Happy) and one low risk (Lonely), have been evaluated by your company. Your stock analysis team has predicted estimated returns and beta risk in the table below for the two stocks and the market. Using this information, and the CAPM model, tell me if Happy is overvalued or undervalued and why that is the case. Then tell me if Lonely is overvalued or undervalued and why that is the case. Show your work in the uploaded document. Est(R) Market Happy 26 33 14 Lonely The risk-free rate is 3% Beta 1.00 1.20 0.75

25. Two stocks, one high risk (Happy) and one low risk (Lonely), have been evaluated by your company. Your stock analysis team has predicted estimated returns and beta risk in the table below for the two stocks and the market. Using this information, and the CAPM model, tell me if Happy is overvalued or undervalued and why that is the case. Then tell me if Lonely is overvalued or undervalued and why that is the case. Show your work in the uploaded document. Est(R) Market Happy 26 33 14 Lonely The risk-free rate is 3% Beta 1.00 1.20 0.75

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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Karen Kay, a portfolio manager at Collins Asset Management, is using thecapital asset pricing model (CAPM) for making recommendations to her clients.Her research department has developed the information shown in the followingexhibit.Forecast Returns, Standard Deviations, and BetasForecast Return Standard Deviation BetaLow β stock (X) 14.0% 36% 0.8High β stock (Y) 17.0% 25% 1.5Market index 14.0% 15% 1.0Risk-free rate 5.0%(a) Calculate expected return and alpha for each stock.(b) Identify and justify which stock would be more appropriate for an investorwho wants to add this stock to a well-diversified equity portfolio.(c) Now consider Karen employs the “Betting Against Beta” strategy and let, , and denote the portfolio weights of the investmentin each of the asset classes (e.g. risk-free asset, low beta stock, market index,high beta stock, respectively) such that .According to its investment mandate, Collins Asset Management shouldtarget a gross leverage of 2.3. How much does she have to…
Pls show steps and also with concept and explanation
You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below. Probability 0.1 0.2 0.4 0.3 a. Compute the expected return for stock X and for stock Y. The expected return for stock X is (Type an integer or a decimal. Do not round.) Economic Condition Recession Slow growth Moderate growth Fast growth Returns Stock X Stock Y - 40 30 80 150 - 110 40 140 210
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.b. The stock of Kaskin, Inc., has more total risk than the stock of Quinn, Inc.c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.
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.)
Help me get the solution please
QUESTION 7: Given the following information: The risk-free rate is 2.5%, the beta of stock A is 1.5, the beta of stock B is 0.78, the expected return on stock A is 11.5%, and the expected return on stock B is 10.5%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. What is the reward-to-risk ratio of stock B? Is stock B fairly priced?
When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero
You are an investment analyst at an asset management firm. Your colleague, the in-house economist, has analyzed all the risky securities in your economy - A, B and C. He provides you with the following statistics: Securities Expected Returns Standard Deviation 0.35 0.25 0.18 A B C 0.15 0.10 0.075 0.03 Risk-Free The Correlation between A and B is 0.2, between B and C is 0.5, and between A and C is 0.3. The prevailing risk-free rate is 3%. What is the Sharpe ratio of the market portfolio in this economy?
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.
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset’s expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Aaron owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Aaron’s portfolio value consists of HDS’s shares, and the balance consists of BSB’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Happy Dog Soap Black Sheep Broadcasting Strong 0.50 30% 42% Normal 0.25 18% 24% Weak 0.25 -24% -30%…
Michael, an analyst at Kitsch Partners (KP), models the stock of the company. Suppose that the risk-free rate rRFrRF = 6.5%, the required market return rMrM = 12.5%, the risk premium for small stocks rSMBrSMB = 3.2%, and the risk premium for value stocks rHMLrHML = 4.8%. Suppose also that Michael ran the regression for Kitsch Partners’s stock and estimated the following regression coefficients: aKPaKP = 0.00, bKPbKP = 0.9, cKPcKP = 0.2, and dKPdKP = 0.3. If Michael uses a Fama-French three-factor model, then which of the following values correctly reflects the stock’s required return? 3.18% 17.94% 7.48% 13.98%

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