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?-just need help understanding this question

Answer 1

	AMAT	TXN	QCOM
Shares	25	12	18
Purchase Price	20.47	76.93	45.34
Total Purchase Price (Shares*Purchase Price)	511.75	923.16	816.12
Portfolio Weight (Total Purchase Price/Total Value of Portfolio)	22.73%	41.01%	36.26%
Expected sales Price	35	98	55
Dividend	0.8	3.08	2.48
Beta	1.25	1.1	1.35
Standard Deviation	0.03	0.05	0.04
Dividend Yield (Dividend/Purchase Price)	3.91%	4.00%	5.47%
Capital Gain Return ((Sale price-Purchase Price)/Purchase Price)	70.98%	27.39%	21.31%
Holding Period Return (Dividend Yield+Capital Gain Return)	74.89%	31.39%	26.78%

Dividend Yield, capital gain return and  holding period return has been given above.

4. Expected return on the portfolio= Sum of all Weight of Share* Holding Period Return of share=74.89%*22.73%+31.39%*41.01%+26.78%*36.26%=39.61%

5. Required rate return as per CAPM model (=Risk Free Rate+Beta* Risk Premium)

for AMAT=3%+1.25*(11%-3%)=13%

for TXN= 3%+1.1*(11%-3%)=11.8%

for QCOM= 3%+1.35*(11%-3%)=13.8%

6. Range of return= Mean+/-Standard deviation

Hence, range of return for AMAT=13%+/-3% i.e. 10% to 16%

for TXN= 11.8%+/-5% i.e 6.8% to 16.8%

for QCOM= 13.8%+/-4% i.e. 9.8% to 17.8%