Question

1. Junior & Co. Company has a beta of 0.9. The Treasury bill rate is 3%....

1. Junior & Co. Company has a beta of 0.9. The Treasury bill rate is 3%. The expected market return is 11%.
a. Explain why the Treasury bill rate could be considered a risk-free rate.
b. Calculate the expected return of Junior & Co.
c. Calculate the market risk premium.

2. You buy a share today for 300 KD. The shares pays no dividend. One year from today, you were able to sell your share for 350 KD. Find the money return and the rate of the return of this share.

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Homework Answers

Answer #1
Ans 1_a
Treasury bill are issued by the government and have not liquidity and default risk
Since they are most secured bond or debt instrument available in the country
they can prefectly be regarded as risk free rate
Ans 1_b expected return = Risk free rate + (Market return - risk free rate)*Beta
3%+(11%-3%)*0.9
10.20%
Ans = 10.20%
Ans 1_c
Market risk premium = Market return - Risk free rate
11%-3%
8.00%
Ans 2 Money return = 50KD
350kd -300 kd =
Rate of return = 16.67%
50/300
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