Question

3. Find three publicly traded stocks in different industries and look up estimates of B. (a) Using Rf=2%, E(Rm) = 10%, calculate the E(r) for each stock. (b) Explain in words a non-finance student could understand why the stocks have different expected returns.

Answer 1

Three publicly traded stocks in different industries with Beta(B) estimates are as follows:

Sl. No.	Stock	Industry	Beta (B)
1	Apple Inc	Multinational Technology Company	1.19
2	Bristol-Myers Squibb Co	Global Biopharmaceutical Company	0.89
3	Bank Of America Corp	Banking	1.26

.

Part-a)

Calculation of Expected return of each stock [ E(r ) ]:

Sl. No.	Stock	Industry	Beta (B)	Rf	E(Rm)	[E(Rm)-Rf]	Working of E(r )	E (r ) = Rf + [E(Rm)-Rf]*B
1	Apple Inc	Multinational Technology Company	1.19	2%	10%	8%	2% + (8%*1.19)	11.52%
2	Bristol-Myers Squibb Co	Global Biopharmaceutical Company	0.89	2%	10%	8%	2% + (8%*0.89)	9.12%
3	Bank Of America Corp	Banking	1.26	2%	10%	8%	2% + (8%*1.26)	12.08%

.

Part-b)

Stocks have different expected returns because they have different risk represented by their Beta.Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market.

The higher the beta higher is the risk associated with the stock and therefore higher expected return by stockholders.

It can be seen with the above table calculations.Apple is having higher expected return than Bristol since it has higher beta....i.e it has higher risk than Bristol. Risk depend on different industries.Different industries have different risks.