In: Finance
Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table 12.1 but that the expected return on the market is still 10%. Use the betas in that table to answer the following questions.
a. Calculate the expected return from Pfizer. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
b. What is the highest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
c. What is the lowest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
risk free rate=6%
return on the market = 10%
Expected returns of all the stocks calculated based on the above formula:
Stock | beta | risk free rate(%) | market return | Expected return |
US Steel | 1.85 | 6 | 10 | 13.4 |
Disney | 1.42 | 6 | 10 | 11.7 |
Ford | 1.31 | 6 | 10 | 11.2 |
General Electric | 1.2 | 6 | 10 | 10.8 |
Monsanto | 1.19 | 6 | 10 | 10.8 |
Boeing | 1.01 | 6 | 10 | 10.0 |
Union Pacific | 1 | 6 | 10 | 10.0 |
Alphabet | 0.96 | 6 | 10 | 9.8 |
ExxonMobol | 0.94 | 6 | 10 | 9.8 |
Amazon | 0.93 | 6 | 10 | 9.7 |
Intel | 0.91 | 6 | 10 | 9.6 |
Pfizer | 0.9 | 6 | 10 | 9.6 |
Starbucks | 0.79 | 6 | 10 | 9.2 |
IBM | 0.59 | 6 | 10 | 8.4 |
McDonald's | 0.51 | 6 | 10 | 8.0 |
Coca Cola | 0.49 | 6 | 10 | 8.0 |
Campbell Soup | 0.47 | 6 | 10 | 7.9 |
Walmart | 0.26 | 6 | 10 | 7.0 |
Newmont Mining | 0.24 | 6 | 10 | 7.0 |
PG&E | 0.23 | 6 | 10 | 6.9 |
a) expected return from Pfizer= 6%+0.90*(10%-6%)= 9.6%
b) highest expected return is offered by US Steel
expected return of US Steel =6% + 1.85*(10%-6%)= 13.4%
c) Lowest expected return is offered by PG&E
expected return of PG&E =6% + 0.23*(10%-6%)= 6.9%