Question

In: Finance

Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table...

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.)

TABLE 12.1 Betas for selected common stocks, January 2011-December 2015 Beta U.S. Steel 1.85 Ford General Electric Monsanto Boelng Unlon Paciflc Alphabet ExxonMobll Amazon Intel Pfizer Starbucks IBM McDonalds Coca-Cola Campbell Soup Walmart Newmont Mining PG&E 1.31 1.20 1.19 1.01 1.00 0.96 0.94 0.93 0.91 0.90 0.79 0.59 0.51 0.49 0.47 0.26 0.24 0.23 NoteBetas are calculated from 5 years of monthly data.

Solutions

Expert Solution

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%


Related Solutions

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.)...
Suppose that the Treasury bill rate is 6% and the expected return on the market stays...
Suppose that the Treasury bill rate is 6% and the expected return on the market stays at 9%. Use the following information. Stock Beta (β) United States Steel 3.09 Amazon 1.39 Southwest Airlines 1.27 The Travelers Companies 1.18 Tesla 1.02 ExxonMobil 0.90 Johnson & Johnson 0.89 Coca-Cola 0.62 Consolidated Edison 0.19 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...
(A) Suppose that the 6-month US Treasury bill rate is equal to 5.98%, and the forward...
(A) Suppose that the 6-month US Treasury bill rate is equal to 5.98%, and the forward rate on a 6-month Treasury bill 6 months from now is 7.88%. (Both are in yearly terms). What is the 1-year bill rate? (Keep your answer to 4 decimal places, e.g 0.1234) (B) Consider two 5-year bonds: one has an 6% coupon rate and sells for $98; the other has an 9% coupon rate and sells for $103. What is the price of a...
The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%....
The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.7? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.9 offers an expected return of 8.7%, does it have a positive or...
The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%
Problem 12-27 CAPM (LO2) The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.7? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.9 offers an expected return of 8.7%, does it have...
Suppose the current interest rate is 6%. What price should we expect to pay for a three-month Treasury bill with face value $10,000 that is a month old?
  - Suppose the current interest rate is 6%. What price should we expect to pay for a three-month Treasury bill with face value $10,000 that is a month old? - Suppose the US dollar is depreciating against the Canadian dollar by 5% per year. If the US nominal interest rate is 10%, and the risk premium is 1%, then Canad's nominal interest rate is: - Suppose Canada and the US are in an equilibrium with a flexible exchange rate...
Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price...
Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.4200 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.3640 Swiss francs per dollar. What is the nominal annual rate of return to the Swiss investor? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your...
A​ 2-year Treasury bill currently offers a 22​% rate of return. A​ 3-year Treasury note offers...
A​ 2-year Treasury bill currently offers a 22​% rate of return. A​ 3-year Treasury note offers a 44​% rate of return. Under the expectations​ theory, what rate of return do investors expect a​ 1-year Treasury bill to pay 2 year from​ now? The rate of return investors expect a​ 1-year Treasury bill to pay 2 years from now is
Suppose the interest rate on a 1-year Canadian Treasury bill is 1.53 percent and the interest...
Suppose the interest rate on a 1-year Canadian Treasury bill is 1.53 percent and the interest rate on a 1-year U.S. Treasury bill is 1.7 percent. Assuming uncovered interest parity holds, we would expect a) the Canadian dollar to appreciate against the U.S. dollar 0.17 percent. b) the Canadian dollar to depreciate against the U.S. dollar by 0.17 percent. c) the nominal exchange rate between Canadian dollars and the U.S. dollar ($Ca/$US) to grow by 0.17 percent. d) Both a...
A Treasury bill is a discount bond issued by the U.S. Treasury. Suppose that on January...
A Treasury bill is a discount bond issued by the U.S. Treasury. Suppose that on January 1, 2012, a one-year Treasury bill with $1000 face value is sold at $970.87. Investors expect that the inflation rate will be 2% during 2012, but at the end of the year, the inflation turns out to have been 1%. What is the nominal interest rate on the bill (measured as the yield to maturity), the expected real interest rate, and the actual real...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT