Question
In: Finance
The following information is given for a stock. Investors assume that the return of the stock...
- The following information is given for a stock. Investors assume that the return of the stock is best explained by a two-factor model that includes the market factor and a second risk factor. Using a dividend discount model, what is the price for this stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %
Current earnings per share= $5,
The ROE is expected to shrink (decrease) at the rate 10% for first 5 years
The ROE is expected to growat the rate 8% forever after the first 5 years
Payout for the first 5 years: 50%
Payout after 5 years: 50%
Solutions
jeff jeffy answered 1 year agoRelated Solutions
The following information is given for a stock. Investors assume that the return of the stock...
The following information is given for a stock. Investors assume
that the return of the stock is best explained by a two-factor
model that includes the market factor and a second risk factor.
Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
The following information is given for a stock. Investors assume that the return of the stock...
The following information is given for a stock. Investors assume
that the return of the stock is best explained by a two-factor
model that includes the market factor and a second risk factor.
Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
The following information is given for a stock. Investors assume that the return of the stock...
The following information is given for a stock. Investors
assume that the return of the stock is best explained by a
two-factor model that includes the market factor and a second risk
factor. Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
The following information is given for a stock. Investors assume that the return of the stock...
The following information is given for a stock. Investors assume
that the return of the stock is best explained by a two-factor
model that includes the market factor and a second risk factor.
Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
You are given the following information: State of Economy Return on Stock A Return on Stock...
You are given the following information:
State of
Economy
Return on
Stock A
Return on
Stock B
Bear
.109
−
.052
Normal
.108
.155
Bull
.080
.240
Assume each state of the economy is equally likely to happen.
Calculate the expected return of each stock. (Do not round
intermediate calculations. Enter your answers as a percent rounded
to 2 decimal places, e.g., 32.16.)
Expected return
Stock A
%
Stock B
%
Calculate the standard deviation of each stock. (Do...
You are given the following information: State of Economy Return on Stock A Return on Stock...
You are given the following information: State of Economy Return
on Stock A Return on Stock B Bear 0.103 -0.046 Normal 0.114 0.149
Bull 0.074 0.234 Assume each state of the economy is equally likely
to happen. a. Calculate the expected return of each stock. (Do not
round intermediate calculations and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.) b. Calculate the
standard deviation of each stock. (Do not round intermediate
calculations and enter your...
You are given the following information: State of Economy Return on Stock A Return on...
You are given the following information:
State of
Economy
Return on
Stock A
Return on
Stock B
Bear
.119
−.062
Normal
.098
.165
Bull
.090
.250
Assume each state of the economy is equally likely to
happen.
Calculate the expected return of each of the following stocks.
(Do not round intermediate calculations and enter your
answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
Expected return
Stock A
%
Stock B...
You are given the following information: State of Economy Return on Stock A Return on...
You are given the following information:
State of
Economy
Return on
Stock A
Return on
Stock B
Bear
.119
−.062
Normal
.098
.165
Bull
.090
.250
Assume each state of the economy is equally likely to
happen.
Calculate the expected return of each of the following stocks.
(Do not round intermediate calculations and enter your
answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
Expected return
Stock A
%
Stock B...
You are given the following information about Stock 1 and Stock 2. Rate of return if...
You are given the following information about Stock 1 and Stock
2.
Rate of return if State Occurs
State of economy
Probability of State of Economy
Stock 1
Stock 2
Recession
0.25
0.11
-0.4
Normal
0.5
0.29
0.1
Boom
0.25
0.13
0.56
The market risk premium is 8% and the risk-free rate is 4%.
(a) Use an appropriate computing tool to help you work out the
following.
(i) Calculate the expected returns of Stock 1 and Stock 2.
(ii) Appraise...
You are given the following information: Stock Expected return (in %) σ (in %) A 10...
You are given the following information: Stock Expected return
(in %) σ (in %) A 10 10 B 5 5 The covariance between these returns
is 16%2 . The risk-free rate is 6%. (a) Find the expected return
and standard deviation of the following portfolios: i. 50% in A,
50% in B ii. 50% in A, 50% in the risk-free asset iii. 150% in A,
financed by borrowing at the risk-free rate
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