Question

Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table 12.1 but that the expected return on the market is still 10%. Use the betas in that table to answer the following questions.

a. Calculate the expected return from Pfizer. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

b. What is the highest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

c. What is the lowest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

risk free rate=6%

return on the market = 10%

Expected returns of all the stocks calculated based on the above formula:

Stock	beta	risk free rate(%)	market return	Expected return
US Steel	1.85	6	10	13.4
Disney	1.42	6	10	11.7
Ford	1.31	6	10	11.2
General Electric	1.2	6	10	10.8
Monsanto	1.19	6	10	10.8
Boeing	1.01	6	10	10.0
Union Pacific	1	6	10	10.0
Alphabet	0.96	6	10	9.8
ExxonMobol	0.94	6	10	9.8
Amazon	0.93	6	10	9.7
Intel	0.91	6	10	9.6
Pfizer	0.9	6	10	9.6
Starbucks	0.79	6	10	9.2
IBM	0.59	6	10	8.4
McDonald's	0.51	6	10	8.0
Coca Cola	0.49	6	10	8.0
Campbell Soup	0.47	6	10	7.9
Walmart	0.26	6	10	7.0
Newmont Mining	0.24	6	10	7.0
PG&E	0.23	6	10	6.9

a) expected return from Pfizer= 6%+0.90*(10%-6%)= 9.6%

b) highest expected return is offered by US Steel

expected return of US Steel =6% + 1.85*(10%-6%)= 13.4%

c) Lowest expected return is offered by PG&E

expected return of PG&E =6% + 0.23*(10%-6%)= 6.9%