# Risk Return, and the Oportunity Cost of Capital

See attached.

YEAR STOCK MARKET RETURN T-BILL RETURN

2003 31.64 1.02

2004 12.62 1.2

2005 6.38 2.98

2006 15.77 4.8

2007 5.62 4.66

13. Risk Premiums and Discount Rates. Top hedge fund manager Diana Sauros believes that a a stock with the same market risk as the S and P 500 will sell at year-end at a price of $50.

The stock will pay a dividend at year-end of $2. What price should be willing to pay for the stock today? (Hing: Start by checking today's 1-year Treasury rates)

14. Scenario Analysis. The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:

Dividend Stock Price

Boom $5 $195

Normal Economy 2 100

Recession 0 0

The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita Shareholder.

Assume for simplicity that the three possible sates of the economy are equally likely. The stock is selling today for $80

22. Risk and Return. A stock will provide a rate of return of either 20% or +28%

a. If both possibilities are equally likely, calculate the expected return and standard deviation.

b. If Treasury bills yield 4% and investors believe that the stock offer a satisfactory expected return, what must the market risk of the stock be?

Vale of reserves per Barrel Value of Reserves, 50 Million Barrels value of Dryholes

Boom $4 200,000,000 0

Normal economy 5 250,000,000 0

Recession 6 300,000,000 0

Is Sassafras Oil a Risky investment for a diversified investor in the stock market-compare, say, to the stock of Leaning

Tower of Pita, described in Practice Problem 14? Explain.

https://brainmass.com/business/working-capital-management/risk-return-oportunity-cost-capital-434962

#### Solution Preview

Exercise 9:

Answer: Given that,

YEAR STOCK MARKET RETURN T-BILL RETURN RISK PREMIUM

2003 31.64 1.02 30.62

2004 12.62 1.2 11.42

2005 6.38 2.98 3.4

2006 15.77 4.8 10.97

2007 5.62 4.66 0.96.

Exercise 13:

13. Risk Premiums and Discount Rates. Top hedge fund manager Diana Sauros believes thata a stock with the same market risk as the S and P 500 will sel at year-end at a price of $50.

The stock will pay a dividend at year-end of $2. What price should be willing to pay for the stock today? (Hing: Start by checking today's 1-year Treasury rates)

Answer: We have,

One year t-bill rate 0.13%

T-bill rate on year before 0.23%

Year end price of the stock $50

Expected dividend payment at the year end $2

Required rate of return for ...

#### Solution Summary

The solution determines the risk return and the opportunity cost of capital.