If the expected return and risk of the market portfolio are respectively 15% and 20% and the riskless rate is 2.5% use the CAPM to determine if the following stocks are mispriced: Stock Expected Return beta Portillo’s 7.5% 0.75 Redbirds Dogs 8.5% 0.90 Windy City Wieners 9.5% 1.25 If mispriced, which is (are) underpriced and which is (are) overpriced?

If the expected return and risk of the market portfolio are respectively 15% and 20% and the riskless rate is 2.5% use the CAPM to determine if the following stocks are mispriced: Stock Expected Return beta Portillo’s 7.5% 0.75 Redbirds Dogs 8.5% 0.90 Windy City Wieners 9.5% 1.25 If mispriced, which is (are) underpriced and which is (are) overpriced?

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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The returns on each of the three stocks are positively correlated, but they are not perfectly correlated. Expected Standard Stock Return Deviation Beta Stock A 10% 20% 1.0 Stock B 10 20 1.0 Stock C 12 20 1.4 The risk-free rate is 5%. The required returns equal expected returns. What is the market risk premium? а. 4.0% b. 4.5% C. 5.0% d. 5.5% A stock has an expected return of 12% percent. The beta of the stock is 1.2 and the risk-free rate is 7%. What is the market risk premium? а. 2.50% b. 3.50% С. 4.17% d. 5.33% Calculate the beta of the stock that has a required rate of return of 14%. The risk-free rate of return is 5% and that the market risk premium is 7%. а. 1.25 b. 1.29 С. 1.50 d. 1.83
Consider the following returns for a portfolio of stocks that replicates the S&P 500 index that has a current market value of £250,000: Time Day 1 Day 2 Day 3 Day 4 Day 5 Return (%) 0.1% 0.2% -0.15% 0.12% 0.08% Required Assuming mean returns of zero, calculate the daily VAR using the RiskMetrics approach and a 95% confidence interval Assuming that returns are independently and identically distributed, compute the weekly VAR and comment on the difference with the 1-day VAR
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What are the expected return and the standard deviation for the CoR Stock? CoR Stock I Probability Rate of Scenario of Scenario Return Worst Case 0.10 -20% Poor Case 0.20 -5% Most Likely 0.40 1% Good Case 0.20 5% Best Case 0.10 30%
When the return on the market portfolio goes up by 5%, the return on Stock A goes up onaverage by 8% and when the market portfolio return goes down by 5%, Stock A return goes down by 6%.a) Calculate the beta of this stock.b) Assuming that CAPM holds, calculate the required rate of return on this stock by assigning values forthe risk-free rate and the expected return on the market portfolio depending on your own choice. (The useof the same risk-free rate and market return by different students will be treated as a cheat attempt).
Stock A's stock has a beta of 1.30, and its required return is 13.75%. Stock B's beta is 0.80. If the risk-free rate is 2.75%, what is the required rate of return on B's stock? Do not round your intermediate calculations.
Which of the following stocks is a better buy? What is the difference between expected return and required return for the best stock? Scenario Probability Stock A Stock B Market Risk-free rate Bust 0.25 -0.15 -0.05 Normal 0.55 0.2 0.1 Boom 0.2 0.4 0.3 Beta 1.2 0.9 Expected return 0.13 0.05
Stock A has a beta of 1.30, and its required return is 11.35%. Stock B's beta is 0.80. If the risk-free rate is 2.90%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 8.10% b. 6.50% c. 7.56% d. 8.45% e. 8.77%
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A stock’s return has the following distribution: Demand for the company’s products Probability of this demand occurring Rate of Return if this demand occurs Weak 0.1 (0.5) Below Average 0.2 (0.05) Average 0.4 0.16 Above Average 0.2 0.25 Strong 0.1 0.60 Use statistical measures to calculate the risk and return of the stock.
You are analyzing a stock that has a beta of 1.3 and a standard deviation of 12.0%. The risk-free rate is 4.2% and you estimate the expected return on the market portfolio to be 11.1%. What return do you expect this stock to have? The expected return according to CAPM is: OA. 13.2% B. 14.3% OC. 19.8% OD. 18.6% OE 12.0% OF. 14.4% OG. 9.8% OH. 8.7% OL 9.0%
Required Rate of Return Stock R has a beta of 1.3, Stock S has a beta of 0.75, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed that on the less risky stock? Do not round intermediate calculations. Round your answer to two decimal places.

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