Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2 (p. 193) - provided below.
Stock Beta (B) Expected return Stock Beta (B) Expected return
Amazon 2.16 15.40% Disney 0.96 7.00%
Ford 1.75 12.60% Newmont 0.63 4.70%
Dell 1.41 10.20% Exxon Mobil 0.55 4.20%
Starbucks 1.16 8.40% Johnson&Johnson 0.5 3.80%
Boeing 1.14 8.30% Campbell Soup 0.3 2.40%
a. Calculate the expected return from Dell.
b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Please refer attached file for better clarity of formulas in MS Excel.
A. Dell's expected return Risk free rate+beta*(market return-risk free rate) 11.64%
Stock Beta (B) T Bill Risk-Free Rate Market Return Expected return
Solution describes the steps to calculate the expected returns in the given cases.
Compute the expected returns for both securities.
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?