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Calculating the expected returns

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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%?

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Solution Summary

Solution describes the steps to calculate the expected returns in the given cases.

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

Formula Calculation
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
Amazon ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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