### Stock Analysis and Risk-Return Calculation**Problem Statement:**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, draw the risk-return graph, with the security market line, and place the Est(R) and the CAPM required rate of return in their appropriate places on the graph. Indicate on the graph why Happy and Lonely are either over-valued or under-valued. Provide your answer in the uploaded document.#### Data Table:| | Est(R) | Beta ||---------------|--------|------|| Market | 26 | 1.00 || Happy | 33 | 1.20 || Lonely | 14 | 0.75 |The risk-free rate is 3%.#### Explanation:1. **CAPM (Capital Asset Pricing Model) Formula:** \[ \text{CAPM Required Rate of Return} = R_f + \beta \times (R_m - R_f) \] Where: - $ R_f $ is the risk-free rate - $ \beta $ is the beta of the stock - $ R_m $ is the market return2. **Security Market Line (SML):** The SML plots the relationship between the expected return of an investment and its risk (represented by beta). The y-axis represents the expected return, and the x-axis represents beta.3. **Graph Details:** - **X-Axis:** Beta (Risk) - **Y-Axis:** Expected Return - **Plot Points:** - Market: (Beta = 1.00, Est(R) = 26) - Happy: (Beta = 1.20, Est(R) = 33) - Lonely: (Beta = 0.75, Est(R) = 14)4. **Steps to Determine Over-Valued or Under-Valued:** - Calculate the CAPM required rate of return for Happy and Lonely. - Compare these to their estimated returns (Est(R)). - Plot these points on the risk-return graph. - Points above the SML indicate an under-valued stock (higher than required

Est (R)BetaMarket261.00Happy0.331.20Lonely0.140.75The Risk-Free rate is 3%

26. 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, draw the risk-return graph, with the security market line, and place the Est(R) and the CAPM required rate of return in their appropriate places on the graph and indicate to me on the graph why Happy and Lonely are either over-valued or under-valued. Provide your answer in the uploaded document. Est(R) Market Happy Lonely 26 33 The risk-free rate is 3% Beta 1.00 1.20 0.75

26. 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, draw the risk-return graph, with the security market line, and place the Est(R) and the CAPM required rate of return in their appropriate places on the graph and indicate to me on the graph why Happy and Lonely are either over-valued or under-valued. Provide your answer in the uploaded document. Est(R) Market Happy Lonely 26 33 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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Suppose the expected return for the market portfolio and risk-free rate are 13 percent and 3 percent respectively. Stocks A, B, and C have Treynor measures of 0.24, 0.16, and 0.11, respectively. Based on this information, an investor should ______?
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
d. Interpret your results in (c) above, assuming that the historical average return of 8.5% from the stock is a good benchmark. e. Critically evaluate the strengths and weaknesses of applying the implied rate of return from the RIVM as a proxy of the expected return.
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?
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 12%, the return on the SMB portfolio (rSMB) is 2.1%, and the return on the HML portfolio (rHML) is 4.6%. If ai = 0, bi = 1.2, ci = -0.4, and di = 1.3, what is the stock's predicted return? Do not round intermediate calculations. Round your answer to two decimal places.
How do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.
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
can you do the question b please
Help me with part E please. Thank you so much a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655. (d) Facebook pays a dividend of 5 GBP and the growth of dividends is equal to 4%for the first two years and then rise to 6%. Assuming constant cost of capitalas computed in point (c), estimate the price of the Facebook share. (e) Consider investing 20% of your wealth in the Facebook share with beta as in, What is the proportion you need to allocate to the Apple share with beta1.8 in order to replicate the market portfolio?
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%
Consider the two stocks below. Which has a positive beta (i.e., tends to move in the same direction as the market)? Which has a higher R2 (1.e., market returns explain more of its return patterns)? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Stock 1 has a positive beta and a higher R² a b C d Stock 2 has a positive beta and a higher R² Stock 1 has a positive beta, but Stock 2 has a higher R Stock 2 has a positive beta, but Stock 1 has a higher R² ft RM Stock 2 Stock 1 Par
*Stock A has a beta of 1.3 and an expected return of 10.2. Stock B has a beta of 0.8 and an expected return of 8.7. If these stocks are priced correctly according to the CAPM, what is the risk-free rate? Give your answer in percentage to the nearest basis point.

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