Question

#11 and #13

(CAPM) The stock is appropriately priced and its expected annual return is 10.4%. The annual return on the 30-year Treasury is 3.5%, and the expected annual return on S&P 500 is 13%. What is the stock's beta coefficient? 12. (CAPM) The stock is appropriately priced and its expected annual return is 14.1%. The annual return on the 30-year Treasury is 2.5%, and the expected annual return on S&P 500 is 12%. What is the stock's beta coefficient? 13 (SMI) A stock is appropriately priced at $40 per share. At this price, the required return is 15% and its beta coefficient is 1.2. At this same point in time, the return on the 20-year Treasury is expected to be 3%. What is the market risk premium? What should happen to the risk-free rate of return, asset beta coefficient, and required return on the stock if the market risk premium increases to 12% from an increase in perceived market risk? two projects, A & fficient of nriste

Answer 1

11. risk free rate =3.5%
Expected Return of stock =10.4%
Expected Market return =13%
Beta Coefficient =(Expected Return of stock -Risk Free rate)/(Market Return -Risk Free rate) =(10.4%-3.5%)/(13%-3.5%) =0.73

13. Required Rate =15%
Risk Free rate =3%
Beta =1.2
Market risk Premium =(Required Rate-Risk Free Rate)/Beta =(15%-3%)/1.2 =10%

Risk Free Rate of Return will remain same at 3%
Asset beta would Remain same at 1.2
The Required Rate =Risk Free rate+Beta*New Market risk Premium =3%+1.2*12% =17.4%