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.

Stock	Beta (β)
United States Steel	3.01
Amazon	1.47
Southwest Airlines	1.35
The Travelers Companies	1.26
Tesla	0.94
ExxonMobil	0.82
Johnson & Johnson	0.81
Coca-Cola	0.70
Consolidated Edison	0.11
Newmont	0.10

1. Calculate the expected return from Johnson & Johnson. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

2. 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.)

3. 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.)

4. 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%.

5. Would Coca-Cola offer a higher or lower expected return if the interest rate were 8%?

Answer 1

expected return = risk free rate + (beta * (expected market return - risk free rate))

Johnson & Johnson = 6% + (0.81 * (9% - 6%)) = 8.43%

Highest expected return = US steel (15.03%)

Lowest expected return = Newmont (6.30%)

Both US Steel and Coca-Cola would offer a higher expected return if the risk free rate is higher. This is because

expected return = risk free rate + (beta * (expected market return - risk free rate))