INVESTMENTS-CONNECT PLUS ACCESS
INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Chapter 10, Problem 1PS
Summary Introduction

To calculate: The estimated rate of return of the investment.

Introduction: The expected rate of return is the value which is expected by the investor after the completion of the maturity period of the investment. This gives the security to the investor for his assumptions.

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Answer to Problem 1PS

The expected rate of return is 15.5% of the stock.

Explanation of Solution

Here, the expected rate of return is calculated as given below,

Return rate = [E(R)+β1F1+β2F2] , here first we calculated F1 and F2 .

Now calculate F1 , A the value of actual (IP) is 5% and E (IP) is 3%

  F1 = 5%  3%   = 2%

Now calculate factor F2 , F2= [Actual (IR)  E (IR)],

  F2= 8%  5%     = 3%,

Now substitute the values of factor in equation, we get,

  Return rate(R)=[E(R)+β1F1+β2F2]=12%+1×2%+0.5×3%=15.5%

Hence the expected rate of return is 15.5 % for the firm.

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