Consider the following information about two stocks (D and E) and two common risk factors (1 and 2): Stock D E Bu 1.2 2.6 Ba 3.4 2.6 E(R.) 13.1% 15.4% Assuming that the risk-free rate is 5%, calculate the levels of the factor risk-premium that are consistent with the reported values for the factor betas and the expected returns for the two stocks. You expect that in one year the prices of for D and E will be $55 and $36. Neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levels in the table above? Suppose that the risk-premium for Factor I that you calculated at point a) suddenly increases by 0.25%, i.e., from x% to (x+0.25)%, where x is the value established at a). What are the new expected returns for D and E? If the increase in the Factor 1 risk-premium in c) does not cause a change in opinion about what the stock prices will be in one year, how will the current prices adjust today?
Consider the following information about two stocks (D and E) and two common risk factors (1 and 2): Stock D E Bu 1.2 2.6 Ba 3.4 2.6 E(R.) 13.1% 15.4% Assuming that the risk-free rate is 5%, calculate the levels of the factor risk-premium that are consistent with the reported values for the factor betas and the expected returns for the two stocks. You expect that in one year the prices of for D and E will be $55 and $36. Neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levels in the table above? Suppose that the risk-premium for Factor I that you calculated at point a) suddenly increases by 0.25%, i.e., from x% to (x+0.25)%, where x is the value established at a). What are the new expected returns for D and E? If the increase in the Factor 1 risk-premium in c) does not cause a change in opinion about what the stock prices will be in one year, how will the current prices adjust today?
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:5. Consider the following information about two stocks (D and E) and two common risk factors
(1 and 2):
Stock
Ba
Biz
E(R₁)
13.1%
D
1.2
3.4
E
2.6
2.6
15.4%
a. Assuming that the risk-free rate is 5%, calculate the levels of the factor risk-premium that are
consistent with the reported values for the factor betas and the expected returns for the two
stocks.
b. You expect that in one year the prices of for D and E will be $55 and $36. Neither stock is
expected to pay a dividend over the next year. What should the price of each stock be today to
be consistent with the expected return levels in the table above?
c. Suppose that the risk-premium for Factor 1 that you calculated at point a) suddenly increases
by 0.25%, i.c., from x% to (x+0.25)%, where x is the value established at a). What are the new
expected returns for D and E?
d. If the increase in the Factor 1 risk-premium in c) does not cause a change in opinion about what
the stock prices will be in one year, how will the current prices adjust today?
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