Question

a) Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 14%. A share of stock sells for £68 today. It will pay a dividend of £3 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

b) Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%. The following are well-diversified portfolios:

Portfolio |
Beta on F |
Beta on F |
Expected Return |

A |
1.7 |
2.2 |
33% |

B |
2.7 |
-0.22 |
30% |

What is the risk premium for each of the two factors?

Answer #1

A.) Assume that the risk-free rate of interest is 6% and the
expected rate of return on the market is 16%. A stock has an
expected rate of return of 4%. What is its beta?
B.) Assume that both portfolios A and B are well diversified,
that ?(?a ) = 12%, and ?(?b ) = 9%. If the
economy has only one factor, and ? a = 1.2, whereas ? b = 0.8,
what must be the risk-free rate?

Assume that the risk-free rate of interest is 4% and the
expected rate of return on the market is 14%. A share of stock
sells for $55 today. It will pay a dividend of $6 per share at the
end of the year. Its beta is 1.5. What do investors expect the
stock to sell for at the end of the year? (Do not round
intermediate calculations. Round your answer to 2 decimal
places.)

Consider the multifactor APT. There are two independent economic
factors, F1 and F2. The
risk-free rate of return is 6%. The following information is
available about two well-diversified portfolios:
Portfolio
ββ on F1
ββ on F2
Expected Return
A
1.0
2.0
19
%
B
2.0
0.0
12
%
Assuming no arbitrage opportunities exist, the risk premium on
the factor F1 portfolio should be

Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 10%, and all stocks have independent firm-specific
components with a standard deviation of 40%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.6
2.0
30
%
B
2.5
–0.20
25
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 4%, and all stocks have independent firm-specific
components with a standard deviation of 53%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.7
1.9
32
B
1.8
-0.7
13
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship
E(rP) =...

Problem 2 [3pts] Suppose portfolios A and B are both
well-diversified with the following properties: Portfolio β1 on F1
β2 on F2 Expected return A 0.7 1.1 9.6% B -0.2 0.9 3.4% There are
two independent economic factors, F1 and F2. The risk-free rate is
1%. What is the expected return-beta relationship in this economy?
(Hint: find risk premium for each factor)

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 48%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.6
2.3
38
B
2.2
-0.6
8
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 40%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.8
2.2
30
B
2.1
-0.5
8
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected Return - beta relationship...

The risk-free rate of return is 8%, the expected rate of return
on the market portfolio is 15%, and the stock of ABC Company has a
beta coefficient of 1.2. ABC Company pays out 40% of its earnings
in dividends, and the latest earning announced were $10 per share.
Dividend were just paid and are expected to be paid annually. You
expect that ABC Company will earn a ROE of 20% per year on all
reinvested earnings forever

What is the required return of the following well-diversified
portfolio if the risk-free rate is 2% and the return on the market
is 9%?
Stock
Amount
Beta
Expected Return
A
$100,000
1.2
10
B
$200,000
0.8
8
C
$100,000
1.4
12

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