Question

Suppose that the Treasury bill rate is 6% rather than 2 %. Assume the expected return on the market stays at 9%. Use the following information. Beta (B) Stock United States Steel 3.05 1.43 Amazon Southwest Airlines 1.31 The Travelers Companies Tesla 1.22 0.98 ExxonMobil 0.86 Johnson & Johnson 0.85 Соcа-Сola 0.66 Consolidated Edison 0.15 0.10 Newmont a. Calculate the expected return from Johnson & Johnson. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) b. Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) c. Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) d. Would U.S. Steel offer a higher or lower expected return if the interest rate were 6% rather than 2%? Assume that the expected market return stays at 9% e. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%? % a. Expected return Highest Expected return Lowest expected return b. С.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Picture 1 - X FX 2 A Bc T-bill Interest rate Market rate of return 9% - 6% Beta 8 Stock United States Steel Amazon Southwest Airlines The Travelers Companies Tesla ExxonMobil Johnson & Johnson Coca-Cola Consolidated Edison Newmont Expected Return 15.15% 10.29% 9.93% 9.66% 8.94% 8.58% 8.55% 7.98% 6.45% 6.30% 3.05 1.43 1.31 1.22 0.98 0.86 0.85 0.66 0.15 0.1 10 11 12 13 14 15 16 a. 17 18 b. 19 20 c. Expected return of Johnson & Johnson 8.55% Highest expected return 15.15% Lowest expected return 6.30% 2% 22 d. 23 24 25 26 27 28 e. 29 If, interest rate Expected return of United states steel 23.35% Expected return of United states steel were lower if the interest rate were 6% rather than 2% If interest rate 8% Expected return of Coca-cola 8.66% Coca-cola expected return would be higher at 8% of interest rate.

Cell reference -

B T-bill Interest rate Market rate of return 0.06 0.09 Beta Stock United States Steel Amazon Southwest Airlines The Travelers Companies Tesla ExxonMobil Johnson & Johnson Coca-Cola Consolidated Edison Newmont 15 16 a. Expected return of Johnson & Johnson 17 18 b. Highest expected return 3.05 1.43 1.31 1.22 10.98 0.86 0.85 0.66 0.15 Expected Return =$C$1+C5*($C$2-$C$1) =$C$1+C6*($C$2-$C$1) =$C$1+C7*($C$2-$C$1) =$C$1+C8*($C$2-$C$1) =$C$1+C9*($C$2-$C$1) =$C$1+C10*($C$2-$C$1) =$C$1+C11*($C$2-$C$1) =$C$1+C12*($C$2-$C$1) =$C$1+C13*($C$2-$C$1) =$C$1+C14*($C$2-$C$1) 0.1 =D5 19 0.02 20 с. Lowest expected return =D14 21 22 d. If, interest rate 23 Expected return of United states steel =C22+C5*(C2-C22) 24 Expected return of United states steel were lower if the interest rate were 6% rather than 2% 25 26 28 e. If interest rate 0.08 Expected return of Coca-cola =C28+C12*(C2-C28) Coca-cola expected return would be higher at 8% of interest rate.

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