Consider the following two scenarios in the economy and the returns in each scen for the market portfolio, an aggressive stock A, and a defensive stock B. a) Required: b) c) Scenario d) Bust Boom Market -8 percent 32 percent Rate of Return Aggressive Stock A -10 percent 38 percent Defensive Stock B -6 percent 24 percent Find the beta of each stock. Explain in what way is Stock B defensive. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the Treasury bill rate is 4 percent, calculate the CAPM for both stocks. Based on your answers above, which stock is worth buying Explain your decision.

Consider the following two scenarios in the economy and the returns in each scen for the market portfolio, an aggressive stock A, and a defensive stock B. a) Required: b) c) Scenario d) Bust Boom Market -8 percent 32 percent Rate of Return Aggressive Stock A -10 percent 38 percent Defensive Stock B -6 percent 24 percent Find the beta of each stock. Explain in what way is Stock B defensive. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the Treasury bill rate is 4 percent, calculate the CAPM for both stocks. Based on your answers above, which stock is worth buying Explain your decision.

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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We know that two stocks A and B are correctly priced by the CAPM model. For A, the expected return is 12%, and the beta is 1.5; for B, the expected return is 6%, and the beta is 0.5. Based on this information, what is the risk free rate and expected market return? Select one: A. 3%; 9% B. 3%; 6% C. 2%; 8% D. 4%; 10%
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −10% −5% Boom 19 25 15 Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Use excel form.
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −9% −5% Boom 29 35 20 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
1. Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .8 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are ____ and ____ percent, respectively. Since the SML reward-to-risk is ____ percent, Stock Y is ____(undervalued/ overvalued) and Stock Z is ____(undervalued/ overvalued).
Use the expected return-beta equation from the CAPM. What is the expected return for a stock if the risk-free rate is 4%, beta 0.9 and the expected return for the market portfolio is 6%? What is the risk-free rate if beta is 1.1, the expected return 6.3% and the expected return for the market portfolio is 6%? What is beta if the risk-free rate is 4%, the expected return 11% and the expected return for the market is 6%? What is the expected return for the market if the risk-free rate is 4%, beta 0.9 and the expected return 11%?
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −8% −10% −6% Boom 32 38 24 Required: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
You're analyzing a stock that has a beta of 1.65. If the risk free rate of return is .04 and market risk premium is .15, what is the required rate of return for this stock?
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.0% 5.0% 2 0.5 20 32 15 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock?
Solve this practice problem in the 2 pictures below
Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom.13.02.32.50 Normal.55.10.22.20 Bust .32.16.21.35 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio's expected return, the variance, and the standard deviation? Note: Do not round intermediate calculations. Round your variance answer to 5 decimal places, e.g., 16161. Enter your other answers as a percent rounded to 2 decimal places, e. g., 32.16. If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.

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