2. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% 2% 8% 20% 30% 16% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is 40% likely to be 4% and 60% likely to be 20%? c. If the T-bill rate is 3% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy. d. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?

2. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% 2% 8% 20% 30% 16% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is 40% likely to be 4% and 60% likely to be 20%? c. If the T-bill rate is 3% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy. d. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P: You have observed the following returns over time: Assume that the risk-free rate is 6% and the...

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Similar questions

You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected return of 18% and a standard deviation of 60%. The correlation coefficient between Stocks A and B is 0.2. What are the expected return and standard deviation of a portfolio invested 30% in Stock A and 70% in Stock B?
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?
The standard deviation of stock returns for Stock A is 40%. The standard deviation of the market return is 20%. If the correlation between Stock A and the market is 0.70, then what is Stock A’s beta?
Consider the expected return for two stocks in two different market conditions: Aggressive Stock Market Return. 9% 18% Risk Free Rate 4% 7% 32% Defensive Stock 5% 16% 4 a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is equally likely to be 9% or 18%? c. What are the alphas of each?