Question

Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why.

Answer 1

It is easy to find the required return on publicly traded bond.

Calulation of required rate of return on equity requires calculation of returns and standard deviations of multiple stocks available and also various variables like risk free rate . market premium , beta , covariance, correlation and other data. This is data intensivce and require highly trained profeesionals and costly softwares. This also involves regressions to perform and calculate the various variables involved.

But in bond we know the characteristics of thebond from the issuer . We just need to know the data regaridng the number of years , coupon rate , redempion value and the current price. Also the current interest rate on similar bonds are easily available. The data from the public traded bond ar emore easily available then stock. Hence