Suppose that the Treasury bill rate is 5% rather than 2%. Assume the expected return on...

Suppose that the Treasury bill rate is 5% rather than 2%. Assume the expected return on the market stays at 9%. Use the following information. Stock Beta (β) United States Steel 3.10 Amazon 1.36 Southwest Airlines 1.24 The Travelers Companies 1.17 Tesla 0.99 ExxonMobil 0.93 Johnson & Johnson 0.92 Coca-Cola 0.59 Consolidated Edison 0.16 Newmont 0.10 Calculate the expected return from Johnson & Johnson. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Would U.S. Steel offer a higher or lower expected return if the interest rate were 5% rather than 2%? Assume that the expected market return stays at 9%. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%? a. Expected return % b. Highest Expected return % c. Lowest expected return % d. Would U.S. Steel offer a higher or lower expected return? e. Would Coca-Cola offer a higher or lower expected return?

Solutions

Expert Solution

Stock	Beta	Expected Returm
United States Steel	3.1	3.10*4+5=17.4
Amazon	1.36	1.36*4+5=10.44
Southwest Airlines	1.24	1.24*4+5=9.96
The Travelers Companies	1.17	1.17*4+5=9.68
Tesla	0.99	0.99*4+5=8.96
ExxonMobil	0.93	0.93*4+5=8.72
Johnson & Johnson	0.92	0.92*4+5=8.68
Coca-Cola	0.59	0.59*4+5=7.36
Consolidated Edison	0.16	0.16*4+5=5.64
Newmont	0.10	0.10*4+5=5.4


United States Steel		Highest Rate of Return
Newmont		Lowest Rate of Return

Would U.S. Steel offer a higher or lower expected return if the interest rate were 5% rather than 2%?
Ans - Lower
Assume that the expected market return stays at 9%. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%?
Ans - Higher

jeff jeffy answered 1 year ago

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