Question
Use the following data to answer the following questions : Economy Probability Sheldon’s Train Emporium (STE)...
Use the following data to answer the following questions :
Economy Probability Sheldon’s Train Emporium (STE) Recession 0.20 4.0% Average 0.50 12.0 Boom 0.30 30.0 Beta 1.10
a. Calculate the expected return for STE?
b. Calculate the standard deviation of returns for STE. What does the standard deviation measure?
c. If the current risk-free rate is 2.50% and the market risk premium is 5.0%, what is STE’s. required rate of return?
d. Is STE under- or over-valued? Hint: Compare your answers to a. and c.
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Answer #1
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