Question

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

1. Calculate the expected return from Johnson & Johnson. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

2. 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.)

3. 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.)

4. Would U.S. Steel offer a higher or lower expected return if the interest rate were 6% rather than 2%? Assume that the expected market return stays at 9%.

5. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%?

Answer 1

a: 8.67%

b: 15.27%

c: 6.3%

d: Higher

(If the interest rate on Treasury bill was 2%, the expected return of the stock would have been lower and now its higher at 6%. )

WORKINGS

Stock	Beta (β)		Expected Return
United States Steel	3.09		15.27%
Amazon	1.39		10.17%
Southwest Airlines	1.27		9.81%
The Travelers Companies	1.18		9.54%
Tesla	1.02		9.06%
ExxonMobil	0.9		8.70%
Johnson & Johnson	0.89		8.67%
Coca-Cola	0.62		7.86%
Consolidated Edison	0.19		6.57%
Newmont	0.1		6.30%