HomeworkLib
Question

very simple question.

Refer to the below question.

Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit. Forecast Returns, Standard Deviations, and Betas Forecast Returrn Standard Deviation Beta 0.8 1.5 1.0 40% Stock X Stock Y Market index Risk-free rate 36% 25 15 7.0 14.0 5.0 a. Calculate expected return and alpha for each stock. Calculate the expected rate of return of the stock X as follows: Calculate the expected rate of return of the stock Y as follows RF =0.05 + 1.5×014-0.05}--. 0.05+0.8x(0.14-0.05) = 0.122 or 12.20% Shouldnt be 0.17? 0.1 850 or 18.50% Therefore, the expected rate of return is 12.20% Therefore, the expected rate of return is 18.50%)

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

✔ Recommended Answer
Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Home nert Page Layout Formulas Data Review View dd-Ins Cut E AutoSum ー E ゴWrap Text ta copy ▼ в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles2 Clear Clipboard Alignment Number Cells Edting KL KM KN KO КР KR KS KT KU KV KW KX 67 68 69 70 71 72 73 74 75 76 Rfbeta(Rm-Rf) EXPECTED RETURN Rm-1496, Rf-5% EXPECTED RETURN FORCAST ALPHA P-R stock RETURN beta 14% 17% 0.8 596 +0.8*(14%-5%)= 1.55%+1.5*(14%-5%)- 12.20% 18.50% 1.8% 1.5% ANS a ANS b AS YOU HAVE ASKED THAT Rm SHOULD BE 17% FOR STOCK Y BUT ACTUALLY, Rm MARKET RETURN 1496, THATS WHY 14% IS USED IN BOTH THE CALCULATIONS STOCK X = 14%, STOCK Y =17% ARE FORECASTED RETURNS AND NOT USED IN CALCULATION OF EXPECTED RETURN 78 79 80 81 82 83 84 4 KE CAPM UTILITY. SHAR BOTH RETURN WILL BE USED IN CALCULATING ALPHA ALPHA = FORECASTED RETURN-EXPECTED RETURN FOR X FOR Y 14%-12.20% = 17%-18.50% 1.80% 1.50% beta bond c future INDEX INTL CAP BUDLEASING PV, FV, ANNUITYDIR cleanYIELD bond tru WACC RESI ex d 130% 04:53

3 0
Add a comment
Know the answer?
Add Answer to:
very simple question. Refer to the below question. Karen Kay, a portfolio manager at Collins Asset...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Similar Homework Help Questions

  • 2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk and Rates of Return:...

    2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk and Rates of Return: Risk in Portfolio Context The capital asset pricing model (CAPM) explains how risk should be considered when stocks and other assets are held . The CAPM states that any stock's required rate of return is the risk-free rate of return plus a risk premium that reflects only the risk remaining diversification. Most individuals hold stocks in portfolios. The risk of a stock held in...

  • Section 3: Capital Asset Pricing Model and Cost of Capital (32 marks) a. Suppose the risk...

    Section 3: Capital Asset Pricing Model and Cost of Capital (32 marks) a. Suppose the risk free rate, FRF is 5%, the return on the market, rm is 14% and beta of stock A is 1.4, what is the required rate of return, rs of stock A? (1 mark) b. If the required rate of return on stock M, is 17%, the risk free rate is 5% and the return to market is 15%, what is the beta of stock...

  • Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the...

    Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Billy have to pay in a 30-day month? a. $139.88 b. $133.22 c. $120.83 d. $126.88 e. $146.87 1 points QUESTION 9 Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT