You are analyzing a regression of DePaolo Foods, a manufacturer of spaghetti and olive oil, against the S&P .500, using monthly returns over 5 years Return( DePaolo Foods) = -0.001 + 1.25 Returns(S&P 500) R2 = 0.25 Assume that you have been asked to be market neutral (assume that the market is correctly priced today). You have computed a historical risk premium of 0.065 by looking at returns on stocks and bonds from 1928 to 2001 and an implied equity premium of 0.045 based upon the S&P 500 today. If the current treasury bill rate is .0.025,the treasury bond rate is 0.047 Estimate the cost of equity for this firm .using the implied equity risk premium What proportion of firm's risk is diversifiable?

You are analyzing a regression of DePaolo Foods, a manufacturer of spaghetti and olive oil, against the S&P .500, using monthly returns over 5 years Return( DePaolo Foods) = -0.001 + 1.25 Returns(S&P 500) R2 = 0.25 Assume that you have been asked to be market neutral (assume that the market is correctly priced today). You have computed a historical risk premium of 0.065 by looking at returns on stocks and bonds from 1928 to 2001 and an implied equity premium of 0.045 based upon the S&P 500 today. If the current treasury bill rate is .0.025,the treasury bond rate is 0.047 Estimate the cost of equity for this firm .using the implied equity risk premium What proportion of firm's risk is diversifiable?

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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5. Last year, Rocket Inc. earned a 19% return. Farmer's Corp. earned 11%. The overall market return last year was 16%, and the risk-free rate was 2%. If Rocket stock has a beta of 1.8 and Farmer's has a beta of 0.5, which stock performed better once you take risk into account? Review Only Click the icon to see the Worked Solution. 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.) Which stock performed better once you take risk into account? (Select the best answer below.) A. Given its beta, Rocket should have earned a much higher return than it did (11% vs 19%). Farmer's, on the other hand, earned a higher return than we would have expected (27.2% vs 9.0%). So taking risk into account, Rocket was the better stock. B. Given its beta, Rocket should have earned a much higher return than it did (27.2% vs 19%). Farmer's, on the other hand, earned a higher return than…
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