Question

Suppose that the Treasury bill rate is 9% rather than 7%, as we assumed in Table 12.1, and the expected return on the market is 13%. Use the betas in that table to answer the following questions.

TABLE 12.1 Betas for selected common stocks, January 2011-December 2015 U.S. Steel Disney Ford General Electric Monsanto Boeing Unlon Pacific Alphabet ExxonMobil Amazon Intel Pfizer Starbucks IBM McDonald's Coca-Cola Campbell Soup Walmart Newmont Mining PG&E Beta 1.85 1.42 1.31 1.20 1.19 1.01 1.00 0.96 0.94 0.93 0.91 0.90 0.79 0.59 0.51 0.49 0.47 0.26 0.24 0.23 Note: Betas are calculated from 5 years of monthly data.

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

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ke - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Dr Wrap Text General SF Merge Merge & Center - Center $ % % , Alignment CD Number 4:0 .00 :.: File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter BIU - D A Clipboard Font AL54 fix - AK AL AM AN Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Find & 2 Clear Filter Select Editing Cells AO AP AQ AR AS AT AU AV AVA 54 Rf=9% Rm=13% 55 56 57 58 EXPECTED RETURN FROM PFIZER ke = Rf + beta*(Rm-Rf) ke = 9% +0.90*(13%-9%) = 12.6% 60 61 62 HIGHER THE BETA, HIGHER THE RETURN US STEEL AS IT HAS HIGHEST BETA 9% +1.85*(13%-9%) = 16.4% PG&E AS IT HAS LOWEST BETA 9% +0.23*(13%-9%) = 9.9% 64 65 66 67 68 69 70 71 K M Convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: AG470 YIELD bond portfolio BOI 130% 9 * WACC RO - O- Rea DOER ENG 30-11-2019)