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Beta and Required Return for Chicago Gear

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1)

(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

a. Calculate the expected returns on the stock market and on Chicago Gear stock.
b. What is Chicago Gear's beta?
c. What is Chicago Gear's required return according to the CAPM?

REALIZED RETURN
State of the Market Probability that State Occurs Stock Market Chicago Gear
Stagnant 0.20 (10%) (15%)
Slow growth 0.35 10 15
Average growth 0.30 15 25
Rapid growth 0.15 25 35

2)

Common stock A has an expected return of 10%, a standard deviation of future returns of
25%, and a beta of 1.25. Common stock B has an expected return of 12%, a standard deviation of future returns of 15%, and a beta of 1.50. Which stock is riskier?

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Solution Preview

Answer:
1) We have,
Risk free rate of return 6%
Realized return:
State of the Market Probability that State Occurs Stock Market Chicago ...

Solution Summary

This solution provides calculations formatted in an attached Excel file.

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Important information about Beta and Required Return

The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
State of the Market Probability that state Occurs Stock Market Chicago Gear
Stagnant 0.20 -10% -15% 9.75% 15.00%
Slow growth 0.35 10% 15%
Average growth 0.30 15% 25%
Rapid growth 0.15 25% 35%

A. Calculate the expected returns on the stock market and on Chicago Gear stock.

B. What is Chicago Gear's beta?

C. What is Chicago Gear's required return according to the CAPM?

(see attached spreadsheet)

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