2. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% 2% 8% 20% 30% 16% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is 40% likely to be 4% and 60% likely to be 20% ? c. If the T-bill rate is 3% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy. d. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?

2. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% 2% 8% 20% 30% 16% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is 40% likely to be 4% and 60% likely to be 20% ? c. If the T-bill rate is 3% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy. d. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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Similar questions

An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?
Now assume that the stock is currently selling at $30.29. What is its expected rate of return?
Consider the expected return for two stocks in two different market conditions: Aggressive Stock Market Return. 9% 18% Risk Free Rate 4% 7% 32% Defensive Stock 5% 16% 4 a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is equally likely to be 9% or 18%? c. What are the alphas of each?
Find the required rate of return on the market if: beta is 1.23, required return on the stock is 9.50%, and risk-free rate is 2.30% A. 9.87% B. 8.40% C. 8.15% D. 8.72% E. 8.32%
2. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% 2% 8% 20% 30% 16% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is 40% likely to be 4% and 60% likely to be 20%? c. If the T-bill rate is 3% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy. d. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?
b) 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 В 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.