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- You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?You expect the risk-free rate to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. Current Expected Expected Stock Beta Price Price Dividend U 1.5 $10 $11.50 $1.00 N 1.1 $27 $30 $0.00 Ο 0.8 $35 $36 $1.50 (Question 2 of 2) What is the required rate of return (based on the CAPM) for an equally weighted portfolio of the three stocks? (Enter your answer as a percentage, i.e., "10.25" for 10.25 percentConsider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
- Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock (b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 a) Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal…Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?
- 2. a. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph. E(R₂) Stock DZA U N Beta 0.85 1.25 -0.20Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 4 percent and the expected return for the market is 17 percent. STOCK BETA A 0.63 B 0.95 C 1.48 a. Using the CAPM, the required rate of return for stock A is B.Using the CAPM, the required rate of return for stock b is C.Using the CAPM, the required rate of return for stock C is (Round to two decimal places.)Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Expected Return (%) 11% Stock Beta A 0.8 B 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results.
- You have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 -12 % 0.2 4 % 0.1 11 0.2 7 0.3 14 0.3 11 0.3 30 0.2 17 0.2 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place.Stock X: % Stock Y: % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places.Stock X: % Stock Y: % Which stock would you consider to be riskier? is riskier because it has a standard deviation of returns.(Expected rate of return and risk) Syntex, Inc is considering an investment in one of two common stocks Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and retum? Common Stock A Probability 0.25 0,50 0:25 Common Stock B Return 10% 17% 10% Probability 0.10 0:40 0:40 010 (Click on the soon in order to copy its contents into a spreadsheet) Return -6% 8% 15% 20% COD a. Given the information in the table the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is 4 36% (Round to two decimal places)Assume you have invested in two other stocks: Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Rf= 2% and Rm = 12%. Using CAPM, what are the expected returns for each stock? Return of stock = Risk free rate + beta ( market rate of return - risk free rate of return) Return of Stock A = 2% + 1.20 (12% - 2%) = 2.12% Return of Stock B = 2% + 0.80 (12% - 2%) = 2.08% What is the expected return of an equally weighted portfolio of these two stocks? Weight of stock A = 0.50 Weight of Stock B = 0.50 Expected return = (Return of Stock A * weight of Stock A) + (Return of Stock B * weight of stock B) = (2.12 * 0.50) + (2.08*0.50) = 1.06 + 1.04 = 3% What is the beta of an equally weighted portfolio of these two stocks? Beta of portfolio = (Beta of Stock A * weight of stock A) + (Beta of Stock B * weight of Stock B) = (1.20*0.50) + (0.80*0.50) = 0.60 + 0.40 = 1 Beta of portfolio = 1 (iv) Sketch the SML to represent the…