Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Portfolio Treasury bills Treasury bonds Common stocks Discount rate Average Annual Rate of Return (8) 3.8 5.3 11.5 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Stock price Average Premium (Extra return versus Treasury bills) (8) % 1.5 7.7 b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $48. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Portfolio Treasury bills Treasury bonds Common stocks Discount rate Average Annual Rate of Return (8) 3.8 5.3 11.5 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Stock price Average Premium (Extra return versus Treasury bills) (8) % 1.5 7.7 b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 average return on the Market is 10% while the nominal risk-free rate is 2.5%. Determine the required rate of return of the portfolio. (In percentage, type the percentage sign on your answer)
Calculating Real Returns and Risk Premiums You’ve observed the following returns on Bennington Corporation’s stock over the past five years: 13 percent, −8 percent, 16 percent, 16 percent, and 10 percent. Suppose the average inflation rate over this period was 1.5 percent and the average T-bill rate over the period was 5 percent. a. What was the average real return on the company's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What was the average nominal risk premium on the company's stock?
Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. Assume that risk-free Treasury securities currently offer an interest rate of 2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Average Premium (Extra return veraus Treasury bills) () Average Annual Rate of Return Portfolio Treasury billa Treasury bonda Common atocks (%) 3.8 5.3 11.5 1.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % Prev 1 of 5 Next > search
You have been asked to calculate the required return for a stock that you are considering investing in. You recently looked up the risk-free rate (as measured by Treasury bonds) and found it to be 1%. You also looked up the current market return of the S&P 500 and found it to be 12. If the firm has a beta of 1.2, what is its required return?
Assume that the expected return and standard deviation of the company stock will be 17 percent, respectively. How appropriate is the sharpe ratio for these assets? When would you use the sharpe ratio?
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –9 percent, 16 percent, 21 percent, and 3 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on the company’s stock?
Palladian Records has a beta of 0.8. The current TT -bond rate is 2.4 %. The annual return on the stock market during the past 33 years was 7.7 %, but investors expect the annual future stock market return to be 7.1 %. Based on the CAPM, what is the firm's required return?
Currently the S&P is returning 11% while Treasury bonds are returning 2%. If a stock has a beta of 1.3 and an expected return of 7%, what is the required return for this stock?
Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $47. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.3%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as Follows. Average Premium (Extra return versus Treasury bills) (%) Average Annual Rate of Return (%) Portfolio Treasury bills Treasury bonds 3.8 5.3 1.5 Common stocks 11.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Discount rate % 6. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price
If the stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.
Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. Assume that risk-free Treasury securities currently offer an interest rate of 2%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are as follows. Average Premium (Extra return versus Treasury bills) ($) Average Annual Rate of Return ipped Portfolio ($) 3.8 Treasury bills Treasury bonds 5.3 1.5 Common stocks 11.5 7.7 Book Ask a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) Print eferences Discount rate 9.70 % b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer decimal places.) Stock price
Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…

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