Rocket's expected return is %. (Enter as a per Farmer's expected return is %. (Enter as a per Which stock performed better once you take risk into account?
Rocket's expected return is %. (Enter as a per Farmer's expected return is %. (Enter as a per Which stock performed better once you take risk into account?
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
Related questions
Question
Transcribed Image Text:**Investment Performance Analysis Case Study**
**Scenario:**
Last year, Rocket Inc. earned a 19% return, while Farmer's Corp. earned an 11% return. The overall market return was 16%, and the risk-free rate was 2%. Given that Rocket stock has a beta of 1.8 and Farmer's has a beta of 0.5, we need to determine which stock performed better when risk is taken into account.
**Instructions for Calculation:**
1. Calculate Rocket's expected return.
2. Calculate Farmer's expected return.
3. Determine which stock performed better after considering the risk.
**Calculate Expected Returns:**
- **Rocket's expected return is __________ %**
- 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.
**Performance Evaluation:**
Select the best answer regarding which stock performed better after accounting for risk:
- **Option A:**
- Rocket, given its beta, should have earned a higher return than it did (11% vs 19%).
- Farmer's earned a return higher than expected (9.0%).
- Conclusion: Rocket was the better stock considering risk.
- **Option B:**
- Rocket, given its beta, should have earned more than it did (27.2% vs 19%).
- Farmer's earned a return higher than expected (11% vs 9.0%).
- Conclusion: Farmer’s was the better stock considering risk.
- **Option C:**
- Rocket, given its beta, should have earned less than it did (11% vs 9.0%).
- Farmer's earned higher than expected (19% vs 27.2%).
- Conclusion: Rocket was the better stock considering risk.
- **Option D:**
- Rocket, given its beta, should have earned more than it did (27.2% vs 19%).
- Farmer's earned less than expected (9.0% vs 11%).
- Conclusion: Rocket was the better stock considering risk.
**Interactive Component:**
Click the icon to see the Worked Solution and verify your calculations and conclusions.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education