Question

In: Finance

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14.0%. A...

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14.0%. According to the capital asset pricing model:

 a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) Expected rate of return %

 b. What would be the expected return on a zero-beta stock? Expected rate of return % 

Suppose you consider buying a share of stock at a price of $45. The stock is expected to pay a dividend of $4 next year and to sell then for $47. The stock risk has been evaluated at β = –0.5.

 c-1. Using the SML, calculate the fair rate of return for a stock with a β = –0.5. (Round your answer to 1 decimal place.) Fair rate of return %

 c-2. Calculate the expected rate of return, using the expected price and dividend for next year. (Round your answer to 2 decimal places.) Expected rate of return %

 c-3. Is the stock overpriced or underpriced? Underpriced Overpriced

Solutions

Expert Solution

a). r = rM = 14% (As the portfolio has the beta of 1)

b). r = rF = 6% (As the stock has zero-beta, which is same as the risk-free rate)

c1). r = rF + beta[E(rM) - rF]

= 6% + (-0.5)[14% - 6%] = 6% - 4% = 2%

c2). r = [P1 - P0 + D] / P0 = [$47 - $45 + $4] / $45 = 13.33%

c3). Because the expected return exceeds the fair return, the stock must be under-priced.


Related Solutions

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 6.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also...
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 7.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price...
The risk-free rate of return is 6%, the expected rate of return on the market portfolio...
The risk-free rate of return is 6%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 2.3. Xyrong pays out 45% of its earnings in dividends, and the latest earnings announced were $9.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 18% per year on all reinvested earnings forever. a. What is the...
The risk-free rate of return is 6%, the expected rate of return on the market portfolio...
The risk-free rate of return is 6%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has a beta coefficient of 1.3. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were $8.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 15% per year on all reinvested earnings forever. a. What is the...
Consider the following information: Portfolio Expected Return Beta Risk free. 12% 0 Market 12.6% 1 A...
Consider the following information: Portfolio Expected Return Beta Risk free. 12% 0 Market 12.6% 1 A 10.6% 0.7 a) calculate the expected return of Portfolio A with a beta of 0.7 b) what is the alpha of portfolio A?
Suppose the risk-free rate is 5.2 percent and the market portfolio has an expected return of...
Suppose the risk-free rate is 5.2 percent and the market portfolio has an expected return of 11.9 percent. The market portfolio has a variance of .0482. Portfolio Z has a correlation coefficient with the market of .38 and a variance of .3385 According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)      Expected return ????? %
Suppose the risk-free rate is 4.10% and the market portfolio has an expected return of 11.25%....
Suppose the risk-free rate is 4.10% and the market portfolio has an expected return of 11.25%. A portfolio is invested equally in three securities with betas of 0.38, 1.13, and 1.18 respectively. What is the expected return on this portfolio? Question 16 options: 10.48% 10.74% 11.00% 11.26% 11.52%
The risk-free rate of return is 10.0%, the expected rate of return on the market portfolio...
The risk-free rate of return is 10.0%, the expected rate of return on the market portfolio is 17%, and the stock of Xyrong Corporation has a beta coefficient of 1.6. Xyrong pays out 30% of its earnings in dividends, and the latest earnings announced were $15 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20% per year on all reinvested earnings forever. a. What is the...
The risk-free rate of return is 9.0%, the expected rate of return on the market portfolio...
The risk-free rate of return is 9.0%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has a beta coefficient of 2.0. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were $20 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 18% per year on all reinvested earnings forever. a. What is the...
The risk-free rate of return is 9.0%, the expected rate of return on the market portfolio...
The risk-free rate of return is 9.0%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has a beta coefficient of 2.0 resulting in a required rate of return of 19.00%. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were $20 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 18% per year...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT