Question

a) You bought Creepy Crawley stock one year ago for $65.14; is now worth $40.77. You also received a dividend of $ 1.85 on this stock. What was your holding period return ? (Leave in decimals 5.92% is .0592 -- take out to 4 decimal places)

b) You are estimating the expected return of Cray Corp's stock. You estimate the return is expected to be -19% in recession, 7% in normal times and 17% in an expansion. Given a 30% change of recession, 50% chance of normal and 20% chance of expansion, what is the expected return on this stock? Put in decimal form with four decimal places.

c) Spider Corp has a beta of 0.6. The risk-free rate is 1.9% and the market risk premium is 5.4% (Note market risk premium is rm-rf) What is the required return on Spider's stock according to the CAPM? (Express in decimals up to four places example .0576)

please explain how you got your answers so i can see where i am messing up in my calculations. thank you in advance!

Answer 1

Qa) Holding period return= ending price - beginning price + dividend/ beginning price

= 40.77 - 65.14 + 1.85 / 65.14

= - 22.52 / 65.14

= -0.3457 or -34.57%

Qb) Expected return = probability of recession × return in recession + probability of normal × return in normal + probability of expansion × return in expansion

= 0.30 × -19% + 0.5 × 7% + 0.20 × 17%

= -5.7% + 3.5% + 3.4%

= 1.2%

Qc) As per CAPM,

Expected return = risk free rate + beta (market risk premium)

= 1.9% + 0.6 (5.4%)

= 1.9% + 3.24%

= 5.14%