Explore BrainMass

Calculating expected returns and expected prices

1). Consider the following data for two risk factors (1 and 2) and two securities (J and L).
rf = 0.05 bJ1 = 0.80
rm1 = 0.02 bJ2 = 1.40
rm2 = 0.04 bL1 = 1.60
bL2 = 2.25

a. Compute the expected returns for both securities.
b. Suppose that security J is currently priced at $22.50 while the price of security L is $15.00. Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now?


Solution Preview

Please refer attached file for better clarity of formulas in MS Excel.

A. rj=rf+bj1*rm1+bj2*rm2=12.20% Expected Return for ...

Solution Summary

Solution describes the steps to calculate expected returns and expected price of given securities.