EBK INVESTMENTS
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 rate of return for Furhman Labs stock and Garten Testing stock.

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?
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Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License