The Duncan Company's stock is currently selling for $ 15. People generally expect its price to rise to $ 18 by the end of next year. They also expect that it will pay a dividend of $. 50 per share during the year. (Hint: Apply Equation 9.2 page 399).

a. What is the expected return on an investment in Duncan's stock?

b. Recalculate the expected return if next year's price is forecast to be only $ 17 and the dividend $. 25.

c. Calculate the actual return on Duncan if at the end of the year the price turns out to be $ 13 and the dividend actually paid was just $. 10.

Solution Preview

The expected rate of return on stock equals its dividend yield plus its capital gains yield. The formulas are:

Expected dividend yield = Expected dividends during ...

Solution Summary

This solution discusses the components of the expected or actual rate of return on a stock, how to compute each, and how to compute the total rate of return on a stock. It then illustrates how to compute the total rate of return on stock.

(6-13): Historical Returns: Expectedand Required Rates of Return
You have observed the following returns over time:
Year Stock X Stock Y Market
2003 14% 13% 12%
2004 19 7 10
2005 216 25 212
2006 3 1 1
2007 20 11 15
Assume that the risk-free rate is 6% and the market risk premium is

The beta coefficient for stock C is bc=0.4 and that for stock D is bd=-.05. (stock D's beta is negative, indicating that its rate of return rises
whenever returns on most other stocks fall. There are very few negative beta stocks, although collection agency and gold mining stokcs
are sometimes cited as examples)

1. Suppose the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor Risk Premium
Industrial production (I) 7%
Interest rates ( R) 3
Consumer confidence ( C) 5
The return on a particular stock is generated according to the following equation:

1. Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):
Stock Rit Rmt
B 11.5% 4.0%
F 10.0 8.5
T 14.0 9.6
C 12.0 15.3
E 15.9 12.4
Rit = return for stock i during period t
Rmt =

Scenario:
Roger has just been hired as chief portfolio officer of Bear United Capital. As part of this new position, he has been asked to assemble a model portfolio from a set of assets. The assets in the model portfolio include the following:
Please see attached word document for data set.
Using the above assets from th

Is the best solution letter B, D or E ??
Stock C has a beta of 1.2, while Stock D has a beta of 1.6. Assume that the stock market is efficient. Which of the following statements is most correct?
a. The required rates of return of the two stocks should be the same.
b. The expectedrates of return of the two stocks should

The expectedreturns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Use the table to complete parts (a) through (e) below.
Demand for Product
Probability of DemandExpectedReturn: Stock A
ExpectedReturn: Stock B
Strong
0.3
40%
20%
Normal
0.45
20%

You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
Stock Beta Current Price Expected Price Expected Dividend
X 1.25 $ 20 $ 23 $ 1.25
Y 1.50 $ 27 $ 29 $ 0.25
Z 0.90 $ 35 $ 38 $ 1.00
a. What ar