Your stockbroker has called to tell you about two stocks: Meta Platforms, Inc. (META) and Tesla Inc. (TSLA). She tells you that META is selling for $255.00 per share and that she expects the price in one year to be $280.00. TSLA is selling for $185.00 per share and she expects the price in one year to be $205.00. The expected return on META has a standard deviation of 18 percent, while the expected return on TSLA has a standard deviation of 35 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for META is 1.20 and the beta for TSLA is 2.00. The 10-year Treasury bond rate is currently 4.00%. Neither META nor TSLA pays a cash dividend. Required: Determine the probability for each stock that you would earn a positive return. Determine the probability for each stock that you would earn less than your required rate of return.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
3. Your stockbroker has called to tell you about two stocks: Meta Platforms, Inc. (META) and Tesla Inc. (TSLA). She tells you that META is selling for $255.00 per share and that she expects the price in one year to be $280.00. TSLA is selling for $185.00 per share and she expects the price in one year to be $205.00. The expected return on META has a standard deviation of 18 percent, while the expected return on TSLA has a standard deviation of 35 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for META is 1.20 and the beta for TSLA is 2.00. The 10-year Treasury bond rate is currently 4.00%. Neither META nor TSLA pays a cash dividend.
Required:
- Determine the probability for each stock that you would earn a positive return.
- Determine the probability for each stock that you would earn less than your required
rate of return .
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