Purchase Solution

Expected, Required and Risk Free Rates of Return

Not what you're looking for?

Ask Custom Question

Please see attached file.

Attachments
Purchase this Solution

Solution Summary

1) Four probable states of the economy may prevail next year. Below are the returns on stocks of A & B companies under each of the probable states & the probabilities for each state. (For this problem, assume that the economy definitely will fall within one of these 4 probable states.)
State of Economy Probability A Stock B Stock
Mild Recession 20.0% 4.00% 5.00%
Low Growth 35.0% 6.00% 7.00%
Moderate Growth 30.0% 9.00% 10.00%
Rapid Growth 15.0% 4.00% 14.00%
Given the probabilities for the 4 possible economic conditions, calculate the expected return for A stock & for B stock.

2) There are 3 new securities available in the market with 4 probable states of the economy. The table below shows the returns on these securities under each of the probable states and the probabilities for each state. (For this problem, we assume that the economy definitely will fall within one of these 4 probable states.)
State of Economy Probability Security 1 Security 2 Security 3
Mild Recession 10.0% 25.0% 4.0% -5.0%
Low Growth 40.0% 20.0% 7.0% 5.0%
Moderate Growth 40.0% 15.0% 12.0% 15.0%
Rapid Growth 10.0% 10.0% 18.0% 30.0%
Given the probabilities for the 4 possible economic conditions, calculate the expected returns for each security.

3) Using the Capital Asset Pricing Model (ks = kRF + (kM - kRF)x βs), calculate the required rate of return for the each of the stocks listed below.
Example: Truman Co. has a beta of 1.8. If the risk-free rate of return is 5% and the expected market return is 12%, what is the required rate of return for Truman Co?
Answer:
KRF MRP Beta MRP * Beta Required Rate
5.0% 7% 1.8 12.6% 17.6%

Assumptions (apply to all problems):
? The Risk-Free Rate of Return (return on long term treasure securities) is 6.5%
? The expected market rate of return is 14.5%.
A) Corp A has a beta of 1.5
B) Corp B has a beta of 1.8
C) Corp C has a beta of 0.75
D) Corp D has a beta of 1.0
E) Corp E has a beta of 2.0
F) Corp F has a beta of 1.2
G) Corp G has a beta of 0.5
H) Corp H has a beta of 1.6

Purchase this Solution


Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.