Question

C. You are analyzing the following stocks by using beta. a. What impact would a 10% increase in the overall market return be expected to have on each asset? b. What impact would a 10 % decrease in the overall market return be expected to have on each asset? c. If you believe that the market return will increase in the near term, which asset would you prefer and why? d. If you believe that the market return will decrease in the near term, which asset would you prefer and why? Increase in Expected Decreas Impact Impact e in on Asset Beta Market Asset on Asset Market Return Return Return Return A 0.5 10% -10% 1.6 10% -10% -0.2 10% -10% -10 % 0.9 10% D. You are the portfolio manager of Lasell 's endowment fund. The current risk free return is 2.5% and you expect the market to return 10 % over the next year. You are currently seeking to add one other stock to the portfolio and have narrowed your choice to 2 stocks. Bentley has a beta of 0.6 and is expected to return 8.5 % over the next year. Regis has a beta of 1.6 and is expected to return 12 % over the next year. a. Using this market information draw the SML line for the market. (The y axis is return and the x axis is beta) b. Plot the position of each investment, labeling each point with aB and R respectively c. Indicate on the line provided as to whether the stock is over or under valued 18 16 14 12 10 8 Regis Bentley 21 0 02 04 0.6 08 1 12 14 16 F. You are analyzing Apple Computer stock and have ascertained that it has a beta of 2.0. If the expected market return is 12% and the risk free return is 3 % what is the required return on Apple Computer stock using CAPM. G.You have analyzed Ford stock and have determined that it has an expected return is 20 % its standard deviation is 15 % . Using a confidence level of 95% what is the high and low expected returns at 95% confidence level. BCD

Answer 1

F) Using CAPM, Required return = Rf + beta x (Rm - Rf)

= 3% + 2 x (12% - 3%)

= 21%

G) z score for 95% confidence is 1.96, which means that range of returns are

Mean +/- z-score x SD

=> High Return = 20% + 1.96 x 15% = 49.40%

=> Low return = 20% - 1.96 x 15% = -9.40%