Question

Suppose the market risk premium is 6 % and the​ risk-free interest rate is 4 %....

Suppose the market risk premium is 6 % and the​ risk-free interest rate is 4 %. Using the data in the​ table,

Starbucks   Hershey   Autodesk
Beta   0.80 0.33 1.96

calculate the expected return of investing in a. ​Starbucks' stock. b.​ Hershey's stock. c.​ Autodesk's stock. Why​ don't all investors hold​ Autodesk's stock rather than​ Hershey's stock?

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a) Starbucks' stock
Expected Return = Risk free Return + Market Risk Premium * Beta
4% + 6% * 0.80
8.80%
b) Hershey's stock
Expected Return = Risk free Return + Market Risk Premium * Beta
4% + 6% * 0.33
5.98%
c) Autodesk's stock
Expected Return = Risk free Return + Market Risk Premium * Beta
4% + 6% * 1.96
15.76%

The expected return of Audotdesk's stock is much higher than Hershey's stock. That's why the investors are don't hold​ Autodesk's stock rather than​ Hershey's stock

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