Question

Riskfree rate 0.03                   

Market rate 0.11

You have three stocks in your portfolio: Applied Materials, Texas Instruments, and Qualcomm. Use their information in the chart below to answer the questions.

	AMAT	TXN	QCOM
Shares	25	12	18
Purchase Price	$20.47	$76.93	$45.34
Expected sales price	$35.00	$98.00	$55.00
Dividend	$0.80	$3.08	$2.48
Beta	1.25	1.10	1.35
Standard deviation	0.03	0 . 0 5	0.04

1. What is each stock’s dividend yield?

2. What is each stock’s capital gain return?

3. What is each stock’s holding period return

4. Using the holding period returns and the data above, calculate your expected return on your portfolio.

5. What is each stock’s required return?

6.         Using the required returns as the means, what is virtually the entire range of returns for each stock?

Answer 1

Portfolio size = (25 * $20.47) + (12 * $76.93) + (18 * $45.34) = $2251.03

1. Dividend yield = (Annual dividend / Stock price) * 100

AMAT: ($0.8/$20.47) * 100 = 3.90%

TXN: ($3.08/$76.93) * 100 = 4.00%

QCOM: ($2.48/$45.34) * 100 = 5.46%

2. Capital gain return = (Expected sales price - Purchase price) / Purchase price * 100

AMAT: ($35 - $20.47/$20.47) * 100 = 70.98%

TXN: ($98 - $76.93/$76.93) * 100 = 27.38%

QCOM: ($55 - $45.34/$45.34) * 100 = 21.30%

3. Holding period return(HPR) = [(Income + V_n - V_o) / V_o]*100

where V_n = the ending value of the investment,

V_o= the beginning value of the investment,

Income= distributions or cash flows from the investment

AMAT: Income= Dividend= $0.8 * 25=  $20

V_n = $990

V_o =$511.75

HPR= ($383.25 / $511.75)*100 = 74.89%

TXN: Income= Dividend= $3.08 * 12 = $36.96

V_n = $1176

V_o =$923.16

HPR= ($289.8 / $923.16)*100 = 31.39%

QCOM: Income= Dividend= $2.48 * 18=  $44.64

V_n = $990

V_o =$816.12

HPR= ($218.52 / $816.12)*100 = 26.77%

4. Expected return on portfolio: (W_A * HPR_A) + (W_T * HPR_T) + (W_Q * HPR_Q)

Weight of AMAT in portfolio = W_A = 22.73%

Weight of TXN in portfolio = W_T= 41.01%

Weight of QCOM in portfolio = W_Q= 36.25%

Expected return = (22.73% * 74.89%) + (41.01% * 31.39%) + (36.25% * 26.77%)

Expected return = (17.02%) + (12.87%) + (9.70%) = 39.59%

5. Required Return: Risk-free rate + beta (Market rate of return - Risk free rate)

AMAT: 0.03 + 1.25 (0.08) = 0.13 = 13%

TXN: 0.03 + 1.10 (0.08) = 0.118 = 11.8%

QCOM: 0.03 + 1.35 (0.08) = 0.138 = 13.8%

6. Range of Returns: Since the risk-free returns are 3%, virtually the range starts from 3% till each stock's required rate of return.