In: Finance
You have observed the following returns over time: | Assume the risk-free rate is 3.55% and the market risk premium is 4.60%. | ||||||||||||
Year | Stock A | Stock B | Market | INPUT DATA | rRF | 3.55% | Market Risk Premium | 4.60% | |||||
1997 | 14.000% | 15.000% | 13.143% | a. What are the betas of Stocks A and B? | |||||||||
1998 | 11.000% | 9.000% | 11.029% | bA | bB | ||||||||
1999 | -2.500% | 5.000% | 4.109% | ||||||||||
2000 | 14.000% | 7.500% | 5.097% | b. What are the required rates of return for Stocks A and B? | |||||||||
2001 | 20.000% | 13.500% | 19.926% | rA | rB | ||||||||
2002 | 21.500% | 14.000% | 24.869% | ||||||||||
2003 | 22.400% | 13.500% | 21.903% | c. What is the required rate of return for a portfolio consisting of 40% A and 60% B? | |||||||||
2004 | 19.900% | 14.400% | 15.972% | INPUT DATA | wA | 40.00% | rp | ||||||
2005 | 21.100% | 16.700% | 13.006% | ||||||||||
2006 | 24.000% | 18.800% | 18.937% | d. Stock A is trading at a price consistent with the security market line. If your analysis suggests that Stock A will provide a return above the SML, does your analysis suggest that Stock A is undervalued or overvalued? Explain. | |||||||||
2007 | 26.300% | 19.700% | 16.960% | ||||||||||
2008 | 25.500% | 21.100% | 17.949% | ||||||||||
2009 | 22.100% | 23.400% | 19.926% | ||||||||||
2010 | 13.500% | 11.500% | 18.937% | ||||||||||
2011 | 6.400% | 8.800% | 10.040% | ||||||||||
2012 | -1.100% | 4.200% | -1.823% | ||||||||||
2013 | -4.000% | 5.600% | -1.328% | ||||||||||
2014 | 6.500% | 6.800% | 5.097% | ||||||||||
2015 | 7.400% | 8.700% | 10.040% | ||||||||||
2016 | 9.900% | 9.900% | 13.006% | ||||||||||
Year | Stock A | Stock B | Market | |||||||||
1997 | 14.00% | 15.00% | 13.14% | |||||||||
1998 | 11.00% | 9.00% | 11.03% | |||||||||
1999 | -2.50% | 5.00% | 4.11% | |||||||||
2000 | 14.00% | 7.50% | 5.10% | |||||||||
2001 | 20.00% | 13.50% | 19.93% | |||||||||
2002 | 21.50% | 14.00% | 24.87% | |||||||||
2003 | 22.40% | 13.50% | 21.90% | |||||||||
2004 | 19.90% | 14.40% | 15.97% | |||||||||
2005 | 21.10% | 16.70% | 13.01% | |||||||||
2006 | 24.00% | 18.80% | 18.94% | |||||||||
2007 | 26.30% | 19.70% | 16.96% | |||||||||
2008 | 25.50% | 21.10% | 17.95% | |||||||||
2009 | 22.10% | 23.40% | 19.93% | |||||||||
2010 | 13.50% | 11.50% | 18.94% | |||||||||
2011 | 6.40% | 8.80% | 10.04% | |||||||||
2012 | -1.10% | 4.20% | -1.82% | |||||||||
2013 | -4.00% | 5.60% | -1.33% | |||||||||
2014 | 6.50% | 6.80% | 5.10% | |||||||||
2015 | 7.40% | 8.70% | 10.04% | |||||||||
2016 | 9.90% | 9.90% | 13.01% | Using SLOPE function of excel with StockA Return as Y axis and Market Return as X axis: | ||||||||
Beta of StockA | 1.083722 | |||||||||||
Using SLOPE function of excel with Stock B Return as Y axis and Market Return as X axis: | ||||||||||||
Beta of StockB | 0.570676 | |||||||||||
Required Return of StockA | ||||||||||||
3.55+1.083722*4.6= | 8.535121 | Percent | 8.54% | |||||||||
Required Return of StockB | ||||||||||||
3.55+0.570676*4.6= | 6.175108 | percent | 6.18% | |||||||||
Required Return of Portfolio: | ||||||||||||
0.4*Return of A +0.6* Return of B | ||||||||||||
0.4*8.535121+0.6*6.175108= | 7.119113 | Percent | 7.12% | |||||||||
If Stock A will provide return higher than SML, it is undervalued | ||||||||||||
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