Question

Stock A has an expected return of 7.82% and a beta of 0.8. Stock B has an expected return of 13.22% and a beta of 1.8. If all stocks are fairly priced, what is the expected return of stock C, which has a beta of 1.3? Percent with 2 decimals.)

Answer 1

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- 2x Σ AutoSum : A ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste BI U D- DA SF Merge Merge & Center - Center $ % % , 4:0 .00 :.: Format Painter Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells NW198 for NQ NR NS NT NUNV NW NX NYNZ OA OB 179 AS ALL STOCKS ARE FAILRLY PRICED, WE CAN COMAPRE STOCK A & B TO CALCULATE RISK PREMIUM . Fill 2 Clear Sort & Filter Editing Find & Select OC OD OE OF 180 181 182 183 184 185 STOCKA EXPECTED RETURN = Rf + beta(Rm-Rf) 7.82% = Rf +0.8(Rm-Rf) EQ. 1 186 STOCKB EXPECTED RETURN = Rf + beta(Rm-Rf) 13.22% = Rf + 1.8(Rm-Rf) EQ.2 187 188 189 190 EQ.2 - EQ. 1 13.22% - 7.82% = (1.8 -0.8) (Rm-Rf) 5.4% = (1.8 -0.8) (Rm-Rf) 5.4% = Rm-Rf 191 192 193 194 195 196 197 PUT VALUE OF Rm-Rf = 5.4% IN EQ.1 7.82% = Rf +0.8(Rm-Rf) 7.82% = Rf +0.8(5.4%) 7.82% = Rf +4.32% Rf = 3.50% 198 100 NO Rea N convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio RESI el KE CAPM UTILITY, SHARPE, beta ferences: AG470 cap stru WACC BOJ 120% . B 9 . * . 40 ENG 04-11-2019

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Σ AutoSum : A Dr General Wrap Text Merge Merge & Center - Center SF $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Calibri -11AA = = = BI U D- DA Font foc NR NS NT Find & Select E Copy Paste Format Painter Clipboard NW218 NQ Sort & Filter Editing Alignment Cells NU NV NW NX NY NZ OA OB OC OD O E OF 199 200 EXPECTED RETURN OF STOCK C EXPECTED RETURN = Rf + beta(Rm-Rf) EXPECTED RETURN = 3.50% + 1.3(5.4%) ANSWER EXPECTED RETURN = 10.52% 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 K M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: AG470 YIELD bond portfolio cap stru WACC BO! 120% B 9 . * . 40 RESI el O Rea . ENG 04-11-2019