7-11. SML Assume that the risk free rate is 2%, the market risk premium is 5%, and the beta of two stocks A and B are 1.4 and 0.8, respectively. a. Calculate both stocks' required rates of return. Answer b. What would be the return on an "average" stock? Answer c. Explain the significance of a security with a 0 beta. What would be this security's required return? d. Assume that the economy worsens and that investors correspondingly revise their attitudes toward stocks, Would this change be better reflected in a shift in the market risk premium to 3.5% or 6.5%? e. Based on your answer to (d), what would be the new required return for stocks A and B? Would you expect stock prices for A and B to fall or rise? Answ f. Ignoring (d) and (e) above, assume that inflationary expectations were revised upward by 0.5%. What would be the change to required returns for stocks A and B? Would their prices fall or rise? Answer
7-11. SML Assume that the risk free rate is 2%, the market risk premium is 5%, and the beta of two stocks A and B are 1.4 and 0.8, respectively. a. Calculate both stocks' required rates of return. Answer b. What would be the return on an "average" stock? Answer c. Explain the significance of a security with a 0 beta. What would be this security's required return? d. Assume that the economy worsens and that investors correspondingly revise their attitudes toward stocks, Would this change be better reflected in a shift in the market risk premium to 3.5% or 6.5%? e. Based on your answer to (d), what would be the new required return for stocks A and B? Would you expect stock prices for A and B to fall or rise? Answ f. Ignoring (d) and (e) above, assume that inflationary expectations were revised upward by 0.5%. What would be the change to required returns for stocks A and B? Would their prices fall or rise? Answer
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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Transcribed Image Text:7-11. SML Assume that the risk free rate is 2%, the market risk premium is 5%, and the
beta of two stocks A and B are 1.4 and 0.8, respectively.
a. Calculate both stocks' required rates of return.
Answer
b. What would be the return on an "average" stock?
Answer
c. Explain the significance of a security with a O beta. What would be this security's
required return?
d. Assume that the economy worsens and that investors correspondingly revise
their attitudes toward stocks, Would this change be better reflected in a shift in
the market risk premium to 3.5% or 6.5%?
e. Based on your answer to (d), what would be the new required return for stocks
A and B? Would you expect stock prices for A and B to fall or rise?
Answeh
f. Ignoring (d) and (e) above, assume that inflationary expectations were revised
upward by 0.5%. What would be the change to required returns for stocks A
and B? Would their prices fall or rise?
Answer
ED ndastandard
only answer e) and f)
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