Question

suppose rRF=5%, rM=10%, and rA=12%.

a. calculate stock A’s beta.

b. if Stock A’s beta were 2.0, then what would be A’s new required rate of return?

return on the WD I TU = -0.4, and An analyst has modeled the si model. The market return is 10%, the return on lile JIU return on the HML portfolio (THML) is 4.8%. If a; = 0, b; = 1.2, c = what is the stock's predicted return? INTERMEDIATE PROBLEMS 5-10 . A stock's return has the following distribution: b012 10 9 Demand for the Company's Products Weak b Below average Average Above average Strong o d -5 Probability of This Rate of Return If T: Demand Occurring Demand Occurs (3 anc 0. 1 biodilucrate -50% nisi 0.2 nosotros bo 0.4 s bad 02 20 0.1 luovo 1.0 low bob blow 0 Calculate the stock's expected return and standard deviation.

Answer 1

Given,

r_{​​​​​​RF}​ = 5%

r_{​​​​​​M} = 10%

r_{​​​​​​A} = 12%

Solution :-

VA - ORF + b(rr - SRF). where, 8A= return of Stock A b = beta of Stock A SRF – risk-free date de = market rate of return رقیاlo/ 12% – 5% + b(10% – 5%) 12% - 5%. + b(5²) 12% – 5% = b (54) 7% = b (5%) 7% = b b = 1.4 So Stock A's beta is 1.4

(6) Stock Als beta = 2.0 ORF = 5% &m z 10% Stock As new required rate of return - SRF + b(om - ORE) = 5% + 2.0 (10% - 5%) - 5%. + 2.0(5%) - S% + 10% = 15 % Thus, rate Stock A's new of return is required % 15
INTERMEDIATE PROBLEMS 5-10

Solution :-

Stock's expected return & | A B C D = EXC Demand Probability Rate of Expected return return (Ex) weak O.) - 50% - 5% Below average 0.2 - 5% -17. Average 0.4 16% 6.4% Above Average 0.2 25% 5 % Strong 60%. 11.4% expected return Thus, the is 11.40%

Standard Rate of deviation of the Stock return Probability of Demand 8 = -50% P = 0. I P = 0.2 I = 0.4 Py = 0.2 P = 0.1 - 16% – 25% = 60% du r Expected return (Ex) = 11.40% Now, SDP-(0, - Ey > , +(- Ev & +(3- Ex + 184 - Ed ly + (ds - Els $0? =(-50). – 11.409.30.) +(+84. – 1.40.3 .2 +(163. - 17.407) 0.4 4 (25%. – 11.40%) 0.2 +[602. - 11.402) .1

So² = (-61.4% 30. 1 +/- 16.4% 30.2+(4.6% 30.4 +(13.6%)*0.2 +(48.6%)*0. / So² = (3769.96%) 0.1 +268.96%) 0.2 +(210 16%) 0.4 + (184.96%) 0.2 +(2361.96%) 0. I SD = 376.996% +53.792% +8.464% + 36.992% + 236.196% So? = 712.44% SD = 1712.44% = 26.69% of Thus, the Standard deviation Stock is 26.69%