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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
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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**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.
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.
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