Question

**Use the chart to answer the questions**

**Year
Return**

**1 2%**

**2 -6%**

**3 -1%**

**4 14%**

**5 -1%**

**6 5%**

**What is the average return on
this stock?**

**What is the standard deviation
of the annual returns?**

**What is the expected return on a stock, given the Beta
is 1.2, the risk-free rate is 2% and the Market risk premium is
6%?**

**What is the most you should pay for a share of common
stock that just paid a dividend of $1.68 if rate of return is 10%
and you expect dividends to increase at a constant rate of
2%?**

Answer #1

1)

Average return on stocks = ( 0.02 - 0.06 - 0.01 + 0.14 - 0.01 + 0.05) / 6

Average return on stocks = 0.13 / 6

Average return on stocks = 0.02167

Variance = [ ( 0.02 - 0.02167)^{2} + ( -0.06 -
0.02167)^{2} + ( -0.01 - 0.02167)^{2} + ( 0.14 -
0.02167)^{2} + ( -0.01 - 0.02167)^{2} + ( 0.05 -
0.02167)^{2}] / 6 - 1

Variance = [ 0.000003 + 0.00667 + 0.001003 + 0.014002 + 0.001003 + 0.000803] / 5

Variance = 0.023484 / 5

Variance = 0.004697

Standard devation is square root of variance

Standard deviation = ( 0.004697)^{1/2} = 0.0685 or
6.85%

2)

Expected return on stock using CAPM model = risk free rate + beta ( market risk premium)

Expected return = 0.02 + 1.2 ( 0.06)

Expected return = 0.092 or 9.2%

3)

Price of share = D1 / required rate of return

Price of share = [1.68 ( 1.02) / 0.1]

Price of share = [ 1.7136 / 0.1]

Price of share = $17.136

4. Calculate the variance of the following
returns.
Year Return
1 -0.20
2 0.04
3 -0.14
4 0.25
5 0.14
Enter the answer with 6 decimals,
e.g. 0.123456.
5. A stock has an expected return of 0.10, its beta is 0.95, and
the expected return on the market is 0.05. What must the risk-free
rate be? (Hint: Use CAPM) Enter the answer in 4 decimals e.g.
0.0123.
1. The Down and Out Co. just issued a dividend of $1.17 per...

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%....

HW #6
1. Use the following information to answer the
questions.
State
Probability
Stock A return
Stock B return
Good
Normal
Bad
0.3
0.6
0.1
8%
2%
-3%
5%
1%
-1%
(a). Given that you form a portfolio by investing $4,000 in
Stock A and $1,000 in Stock B, what is the expected return on your
portfolio?
(b).What is the variance and standard deviation of your
portfolio?
(c). Suppose that Stock A has a beta of 1.5 and Stock B...

1. ِRami requires a return of 12 percent. A stock
sells for $18, it pays a dividend of $1, and the dividends compound
annually at 6 percent. What should the price of the stock be?
2. You are considering a stock A that pays a dividend of $1. The
beta coefficient of A is 1.3. The risk free return is 6%, while the
market average return is 13%. a. What is the required return for
Stock A? b. If A is...

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?

Suppose a 30-year bond is selling for $1276.76. with a rate of
return of 6% What is its coupon payment?
3- suppose that the market risk premium is 6%. What is the stock
risk premium knowing that beta equals to 0.90. 4-Assume that the
beta of Apple stocks is 0.99 and Facebook is 1.2. knowing that the
risk free rate for treasury bill is 3%. And the expected market
return is 5%. Calculate the expected return for a portfolio
invested...

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

10-6 COST OF COMMON EQUITY The future earnings, dividends, and
common stock price of Callahan Technologies Inc. are expected to
grow 6% per year. Callahan's common stock currently sells for
$22.00 per share; its last dividend was $2.00; and it will pay a
$2.12 dividend at the end of the current year.
a. Using the DCF approach, what is its cost of common
equity?
b. If the firm's beta is 1.2, the risk-free rate is 6%, and the
average return...

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.)

Use a risk-free rate of 1% and a market return of 6% for the
following question. What is the expected return for a stock with a
beta of 1.25 and what is the market risk premium?

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