Maynard Crabbes has determined the expected return on the market portfolio at 17% and a 5%...

Maynard Crabbes has determined the expected return on the market portfolio at 17% and a 5% return on the risk-free security when examining Anstell Ltd. shares for possible additional investment, given that he has been acquiring shares in the company each year for the last 4 years. From plotting historical returns he has assessed that returns for Anstell Ltd. have outperformed or underperformed the market on average by a factor of 1.7.

Required:

(1) What is the company’s risk-adjusted rate of return?

(2) Given that Maynard has forecast next years return for Anstell Ltd. shares to be 20%, should he be deciding to; hold, buy or sell shares in the company?

(3) Based on your prior discussion, are the company shares currently undervalued, overvalued, or correctly valued?

Solutions

Expert Solution

Using CAPM model,

Required Rate = 0.05 + 1.70(0.17 - 0.05) = 25.40%

One should sell the shares as forecasted return is less than required return on stock

As forecasted return is less than required return on stock, stock is overvalued

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Given that the risk-free rate is 5% and the expected return on the market portfolio is...

Given that the risk-free rate is 5% and the expected return on the market portfolio is 10%, if bush company's beta is 2, what is Dow's expected return? A. 18% B. 21% C. 10% D. 15% What is the best measure of risk for an asset that is to be held in isolation (one stock portfolio)? A. market risk B. Beta C. Diversifiable risk D. Standard deviation Which is the best measure of risk for choosing an asset which is...

The risk-free rate is 5%, the expected return on the market portfolio is 14%, and the...

The risk-free rate is 5%, the expected return on the market portfolio is 14%, and the standard deviation of the return on the market portfolio is 25%. Consider a portfolio with expected return of 16% and assume that it is on the efficient frontier. (a) What is the beta of this portfolio? (b) What is the standard deviation of its return? (c) What is its correlation with the market return? (d) Draw the portfolio in two diagrams: one in the...

You are managing a risky portfolio with an expected rate of return of 17% and a...

You are managing a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. You think that this risky portfolio is best one that you can construct to deliver the best tradeoff between risk premium and return. The T-bill rate is 7%. Suppose your risky portfolio includes the following investments in the given proportions: Stock A … 27% Stock B … 33% Stock C … 40% 1.) Eric just had a baby last year...

Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%,...

Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market portfolio is 20%, answer the following questions: You have $100,000 to invest. How should you allocate your wealth between the risk free asset and the market portfolio in order to have a 15% expected return? What is the standard deviation of your portfolio in (a)? Now suppose that you want to have a portfolio, which...

You have a three-stock portfolio. Stock A has an expected return of 17 percent and a...

You have a three-stock portfolio. Stock A has an expected return of 17 percent and a standard deviation of 38 percent, Stock B has an expected return of 20 percent and a standard deviation of 56 percent, and Stock C has an expected return of 15 percent and a standard deviation of 38 percent. The correlation between Stocks A and B is 0.30, between Stocks A and C is 0.20, and between Stocks B and C is 0.05. Your portfolio...

The market portfolio has an expected return of 8.6% with a volatility of 17.2% while the...

The market portfolio has an expected return of 8.6% with a volatility of 17.2% while the T-bills earn 3.9%. Your degree of risk aversion is 3.9. You have $50,000 to invest. How much (in $, NOT in %) will you invest in the market portfolio? {Enter your answer in dollars with 2 decimals, but do not use the "$".}

The expected return of market portfolio is 10%. The standard deviation of market portfolio is 20%....

The expected return of market portfolio is 10%. The standard deviation of market portfolio is 20%. Risk free interest rate is 2%. There is an investor with mean-variance utility function Answer the following questions. 1) Calculate the optimal weight to be invested in the market portfolio for the investor with A=5 . Calculate the expected return and standard deviation of the optimal complete portfolio for the investor. 2) According to the CAPM, calculate the expected returns of two stocks (stock 1...

Assume that you manage a risky portfolio with an expected rate of return of 17% and...

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. QUESTION 12 What is the Sharpe ratio of your risky portfolio? A. 27% B. 37% C. 19.32% D. 62.9% E. 17.58% 4 points QUESTION 13 What is the Sharpe ratio of your overall portfolio?...

Assume that you manage a risky portfolio with an expected rate of return of 17% and...

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 35%. The T-bill rate is 4.5%. A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 25%. What is the expected rate of return on your client's overall portfolio? Expected rate of return?

Assume that you manage a risky portfolio with an expected rate of return of 17% and...

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 33%. The T-bill rate is 6%. Your client chooses to invest 75% of a portfolio in your fund and 25% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? (Round your answers to 2 decimal places.) Expected return % per year Standard deviation % per year b. Suppose your risky...

Subjects