Business Finance Ch 11 Homework - Connect

Consider the following information: Probability of State Rate of Return if State Occurs Economy Prob of State Stock A Stock B Recession .24 .030 -.39 Normal. .59 .110 .29 Boom .17 .280 .52 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b.Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

(a) Excepted return A = 11.97% Expected return B = 16.59% (b) Standard devi of A= 7.97% Standard devi of B = 32.34% Work shown here: https://gyazo.com/04d0061e5339ccb5565540ce32bb9f97

A stock has a beta of 1.07, the expected return on the market is 10.1 percent, and the risk-free rate is 4.9 percent. What must the expected return on this stock be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

CAPM (Capital Asset Pricing Model) = Expected Return = Risk free rate + Beta [Return on market Rs = Rf + B(Rm - Rf) Rs = 4.9% + 1.07 x (10.10% - 4.9%) Rs = 10.464% Expected return on stock = 10.464%

A stock has an expected return of 14.9 percent, the risk-free rate is 5.85 percent, and the market risk premium is 7.6 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Calculation of Beta According to CAPM : Expected Return = rf + Beta (rm - rf) 14.9 = 5.85 + X (7.6) 14.9 - 5.85 = 7.6X X = 1.191 Beta of the Stock is 1.191

You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.1 percent. Assume D has an expected return of 14.6 percent, F has an expected return of 10.5 percent, and the risk-free rate is 5.8 percent. If you invest $50,000 in Stock D, how much will you invest in Stock F? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Computation of the investment for F The expected portfolio in one yr 50,000 x 1.146 + F(1.105) + r(1.058) = 100,000(1.111) F(1.105) + r(1.058) = 53,800 r = (50,000 -F) [substitute] F(1.105) + (50,000 -F)(1.058) = 53,800 F = 900/0.047 F = $19,148.94

You own a portfolio that has $1,800 invested in Stock A and $2,900 invested in Stock B. Assume the expected returns on these stocks are 9 percent and 15 percent, respectively. What is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return= risk-free rate +Beta*(MArket rate- risk-free rate ) Expected Return on the Portfolio = (9*1800)/(1800 + 2900) + (15*2900)/(1800 + 2900) = 12.70% Expected Return on the Portfolio = 12.70%.

You own a stock portfolio invested 17 percent in Stock Q, 23 percent in Stock R, 37 percent in Stock S, and 23 percent in Stock T. The betas for these four stocks are .93, .99, 1.39, and 1.84, respectively. What is the portfolio beta? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Portfolio Beta is 1.32 Particulars: Weight x Beta = Weighted Beta Stock Q: 17% x 0.93 = 0.16 Stock R: 23% x 0.99 = 0.23 Stock S: 37%x 1.39= 0.51 Stock T: 23%x 1.84 =0.42 Sum of weighted Beta(s) Portfolio Beta is 1.32

Stock Y has a beta of 1.60 and an expected return of 16.0 percent. Stock Z has a beta of .95 and an expected return of 11.7 percent. If the risk-free rate is 4.70 percent and the market risk premium is 7.20 percent, are these stocks overvalued or undervalued?

Stock Y CAPM return = 4.95%+1.5*7.45% CAPM return = 16.13% CAPM Return>E(Ri) Yes Overvalued Stock Z CAPM return = 4.95%+0.95*7.45% CAPM return = 12.03% CAPM Return>E(Ri) Nope Undervalued

You own a portfolio that is 24 percent invested in Stock X, 39 percent in Stock Y, and 37 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent, respectively. What is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

The return on portfolio is the weighted average of the 3 stocks Return of portfolio = 24%*10% + 39%*13% + 37%*15% Return of portfolio = 2.4% + 5.07% + 5.55% Return of portfolio =13.02%

What are the portfolio weights for a portfolio that has 160 shares of Stock A that sell for $89 per share and 135 shares of Stock B that sell for $102 per share? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

Total value of A=(160*89)=$14240 Total value of B=(135*102)=$13770 Total value =$28010 Stock A = 14240/28010 Stock A = 0.5084 Stock B = 13770/ 28010 Stock B = 0.4916

Stock Y has a beta of 1.45 and an expected return of 16.3 percent. Stock Z has a beta of .90 and an expected return of 12.6 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

expected return= risk-free rate +Beta*(MArket rate- risk-free rate ) Stock Y 16.3=Rf+1.45(Rm-Rf) 16.3=1.45Rm-0.45Rf Rm=(16.3+0.45Rf)/1.45 Stock Z 12.6=Rf+0.9*(Rm-Rf) 12.6=0.9Rm+0.1Rf 12.6=0.9(16.3+0.45Rf)/1.45+0.1Rf risk free rate=(12.6-10.11724138)/(0.279310344+0.1) risk free rate= 6.55%