EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 9, Problem 2CP
Summary Introduction
To calculate: The presumed
Introduction: The expected return is the benefit or loss, an investor envisions on speculation that have known or foreseen paces of return.The expected return for a financial speculation is the expected value of its return. It is a proportion of the centre of the arbitrary variable that is the return.
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Wilson is now evaluating the expected performance of two common stocks, Furhman Labs Inc. and Garten Testing Inc. He has gathered the following information:∙ The risk-free rate is 5%.∙ The expected return on the market portfolio is 11.5%.∙ The beta of Furhman stock is 1.5.∙ The beta of Garten stock is .8.Based on his own analysis, Wilson’s forecasts of the returns on the two stocks are 13.25% for Furhman stock and 11.25% for Garten stock. Calculate the required rate of return for Furhman Labs stock and for Garten Testing stock. Indicate whether each stock is undervalued, fairly valued, or overvalued.
Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-
free rate is 4.0 percent, the expected return on the market is 121 percent, and the betas of the two stocks are 1.2 and .9, respectively.
Landon's own forecasts of the returns on the two stocks are 14.40 percent for Furhman Labs and 11.10 percent for Garten.
a. Calculate the required return for each stock. (Do not round Intermediate calculations. Enter your answers as a percent rounded to
2 decimal places.)
Stock
Required Return
Furhman Labs
Garten Testing
%
%
b. Is each stock undervalued, fairly valued, or overvalued?
Furhman Labs
Undervalued
Overvalued
Fair valued
Garten Testing
Overvalued
Undervalued
Fair valued
Barry wishes to compute the beta of a stock that has a correlation of 0.64 with the market.
The following data is available:
Standard Deviation of Returns of Stock = 14.1%.
Standard Deviation of Returns of Market = 9.44%.
1) Calculate the beta of the stock
2)
If the risk free rate is estimated to be 3%, market return 9% and given the beta that you
calculated in question 1, what is the expected return of the stock?
3)
If the actual return next year turned out to be 10% what is the Jensen's alpha? Is Barry, the
investor happy or disappointed?
4)
Using data for the stock presented and/or calculated above, what is the Sharpe ratio? When is
this measurement appropriate?
5)
Using data for the stock presented and/or calculated above, what is Treynor measure? When is
this measurement appropriate?
Chapter 9 Solutions
EBK INVESTMENTS
Ch. 9 - Prob. 1PSCh. 9 - Prob. 2PSCh. 9 - Prob. 3PSCh. 9 - Prob. 4PSCh. 9 - Prob. 5PSCh. 9 - Prob. 6PSCh. 9 - Prob. 7PSCh. 9 - Prob. 8PSCh. 9 - Prob. 9PSCh. 9 - Prob. 10PS
Ch. 9 - Prob. 11PSCh. 9 - Prob. 12PSCh. 9 - Prob. 13PSCh. 9 - Prob. 14PSCh. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Prob. 21PSCh. 9 - Prob. 22PSCh. 9 - Prob. 23PSCh. 9 - Prob. 24PSCh. 9 - Prob. 1CPCh. 9 - Prob. 2CPCh. 9 - Prob. 3CPCh. 9 - Prob. 4CPCh. 9 - Prob. 5CPCh. 9 - Prob. 6CPCh. 9 - Prob. 7CPCh. 9 - Prob. 8CPCh. 9 - Prob. 9CPCh. 9 - Prob. 10CPCh. 9 - Prob. 11CPCh. 9 - Prob. 12CP
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- The two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. Describe your two stocks portfolio by calculating its return and beta. Show your calculationsarrow_forwardYou are given information on two stocks. Stock AXE has a required return of 12.25% and analysts expected the stock to provide a return of 13%. The beta of AXE stock is 1.15. Stock NIP has a beta of 1.6 and analysts expected the returns of Stock NIP to be 14%. The risk-free rate is 5%. What is the market risk premium? What is the required return of Stock NIP? Which of the two stocks would you purchase and why?arrow_forwardPlease do this in Excel using relevant formulas. Stock A has a beta of 0.5, and investors expect it to return 8%. Stock B has a beta of 1.5, and investors expect it to return 12%. Use the CAPM to find the market risk premium and the expected rate of return on the market.arrow_forward
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