Last year, Rocket Inc. earned a 20% return. Farmer's Corp. earned 10%. The overall market return last year was 15%, and the risk-free rate was 2%. If Rocket stock has a beta of 1.9 and Farmer's has a beta of 0.6, which stock performed better once you take risk into account? Rocket's expected return is 26.7 %. (Enter as a percentage and round to one decimal place.) Farmer's expected return is %. (Enter as a percentage and round to one decimal place.)
Last year, Rocket Inc. earned a 20% return. Farmer's Corp. earned 10%. The overall market return last year was 15%, and the risk-free rate was 2%. If Rocket stock has a beta of 1.9 and Farmer's has a beta of 0.6, which stock performed better once you take risk into account? Rocket's expected return is 26.7 %. (Enter as a percentage and round to one decimal place.) Farmer's expected return is %. (Enter as a percentage and round to one decimal place.)
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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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
ch5 Q5 practice
![**Title: Evaluating Stock Performance with Risk Consideration**
**Scenario:**
Last year, Rocket Inc. earned a 20% return, while Farmer's Corp. earned 10%. The overall market return was 15%, and the risk-free rate was 2%. Given Rocket's beta of 1.9 and Farmer's beta of 0.6, we aim to assess which stock performed better when risk is taken into account.
**Calculation of Expected Returns:**
1. **Rocket's Expected Return:**
- Formula used: Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
- Result: Rocket's expected return is **26.7%**.
2. **Farmer's Expected Return:**
- Formula: Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
- Input and Calculation Box: [ ] (for user entry of Farmer's expected return).
**Instruction:**
Please enter Farmer's expected return as a percentage and round to one decimal place.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F04b75ea7-69f8-44f3-a33a-ba23330f1240%2F6039c071-61a8-4687-99f9-ce86bab89b44%2F25o4trg_processed.png&w=3840&q=75)
Transcribed Image Text:**Title: Evaluating Stock Performance with Risk Consideration**
**Scenario:**
Last year, Rocket Inc. earned a 20% return, while Farmer's Corp. earned 10%. The overall market return was 15%, and the risk-free rate was 2%. Given Rocket's beta of 1.9 and Farmer's beta of 0.6, we aim to assess which stock performed better when risk is taken into account.
**Calculation of Expected Returns:**
1. **Rocket's Expected Return:**
- Formula used: Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
- Result: Rocket's expected return is **26.7%**.
2. **Farmer's Expected Return:**
- Formula: Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
- Input and Calculation Box: [ ] (for user entry of Farmer's expected return).
**Instruction:**
Please enter Farmer's expected return as a percentage and round to one decimal place.
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