Question

A stock has a beta of 1.112. Calculate its expected return via CAPM. E[rmkt] 0.095 0.10396 rf 0.015 This stock has a current price of $20 per share, with a consenus "target" price of $25 per share. Calculate the expected return implied by the price and target, assuming it pays no dividends. Does the stock offer +alpha or -alpha? Would you buy it or not? Explain.

Answer #1

expected return (CAPM) = rf + (beta * (E[rmkt] - rf))

expected return (CAPM) = 0.015 + (1.112 * (0.095 - 0.015))

expected return (CAPM) = 0.10396, or 10.396%

expected return implied by the price and target = (target price - current price) / current price

expected return implied by the price and target = ($25 - $20) / $20

expected return implied by the price and target = 25%

The stock offers +alpha. This is because the expected return implied by the price and target is higher than the expected return via CAPM. Therefore, I would buy the stock

10) Stay-Home's stock has the required return of 10% and beta of
1.2. Given that the market return is 9%, using the CAPM, what is
the risk-free rate?
-Mama Mia Inc. just paid $5 dividends per share; it was $3.25
seven years ago. Assuming a constant growth rate and 10% required
return.
13) How much is their dividend growth rate?
14) What is the current stock price of Mama Mia?

CASA has no debt. The action's beta, BE, is 1.2 and its expected
return, RE, is 12.5%. The company decides to go into debt at the
risk-free rate, Rf, of 5% to buy 40% of its shares. Capital markets
are assumed to be perfect:
a) Find the value of RE after the buyback operation knowing that
before the operation the expected earnings per share (EPS) was $
1.5 and the expected PER (the ratio between the share price and the...

Consider two stocks, A and B. Stock A has an expected return of
10% and a beta of 1.1. Stock B has an expected return of 16% and a
beta of 1.2. The market degree of risk aversion, A, is 4. The
variance of return on the market portfolio is 0.0175. The risk-free
rate is 5%. Required: (4*2.5 = 10pts) A. What is the expected
return of the market? B. Using the CAPM, calculate the expected
return of stock A....

Problem 13-15 Using CAPM [LO4] A stock has an expected return of
10.5 percent, its beta is 1.15, and the risk-free rate is 5
percent. What must the expected return on the market be? (Do not
round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.) Market expected return
%

Suppose you collect the information of two
stocks:
Expected Return
Standard Deviation
Beta
Stock A
13%
15%
1.6
Stock B
9.2%
25%
1.1
a. If you have a well-diversified portfolio of 50 stocks and you
are considering adding either Stock A or B to that portfolio, which
one is a riskier addition and why?
If you are a new investor looking for your first stock investment,
which is a riskier investment for you and why?
b. If the...

What is the difference between the required rate of return and
the expected rate of return?
According to the scenario using the analysis of the current
growth model for the required rate of return and the excepted rate
of return we were asked if we could give the investors a 15% return
CAPM We used beta as an estimate number which gave us a benchmark
TF wanted to know the value of their stock and keep in mind admin
changes...

A stock has a beta of 0.79, the expected return on the market
is 11%, and the risk-free rate is 1.5%. Calculate the expected
return on the stock. (Enter percentages as decimals and round to 4
decimals)
A stock has an expected return of 20%, the risk-free rate is
1.5%, and the market risk premium is 8%. Calculate the beta of this
stock. (Round to 3 decimals)
A stock has an expected return of 10%, its beta is 0.59, and...

QUESTION ONE A. You are presented with the following two
stocks.
Stock Beta (β) Expected Return
A
1.4
25%
B
0.7
14%
Assuming that the Capital Asset Pricing Model (CAPM) assumptions
hold true, calculate:
I. The return on the market.
II. The risk-free rate.
III. The risk premium for stock A.

Consider the following information:
Portfolio
Expected Return
Beta
Risk-free
12
%
0
Market
13.8
1.0
A
11.8
0.9
a. Calculate the expected return of portfolio
A with a beta of 0.9. (Round your answer to 2
decimal places.)
Expected return
%
b. What is the alpha of portfolio A.
(Negative value should be indicated by a minus
sign. Round your answer to 2 decimal
places.)
Alpha
%
c. If the simple CAPM is valid, is the above
situation possible?
Yes...

Home Interior's stock has an expected return of 13.2 percent and
a beta of 1.28. The market return is 10.7 percent and the risk-free
rate is 2.8 percent. This stock is overvalued or undervalued?
____________ because the CAPM return for the stock is ________
percent. If Home Interior's expected return rose to 14.12%, the
stock would be overvalued or undervalued? ____________ because the
CAPM return for the stock is ________ percent. Please show your
work.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 10 minutes ago

asked 18 minutes ago

asked 21 minutes ago

asked 27 minutes ago

asked 31 minutes ago

asked 34 minutes ago

asked 36 minutes ago

asked 43 minutes ago

asked 58 minutes ago

asked 59 minutes ago

asked 59 minutes ago