6-12 Suppose you purchased 16 shares of Disney stock for $24.22 per share On May

Question

6-12 Suppose you purchased 16 shares of Disney stock for $24.22 per share On May 1, 2012. On September 1 of the same year, you sold 12 shares of the stock for $25.68. Calculate the holding period dollar gain for the shares you sold, assuming no dividend was distributed and the holding period rate of return.

6-15 Using the CAPM estimate the appropriate required rate of return for the three stocks listed here given that the risk free rate is 5 percent and the expected return for the market is 12 percent.

6-16 a. Calculate the monthly holding period returns for Merck and the S&P 500 index. b. What are the average monthly returns and standard deviation for each?

Explanation / Answer

6-12

Holding period dollar gain = Number of shares(Selling price - Buying Price)

= 12(25.68-24.22)

= $17.52

Rate of return = ((25.68-24.22)/24.22)*100 = 6.02%

Holding period arte of return = 6.02(4/12) = 2%

6-15

CAPM for the stocks

Stock A:

Required rate of return, R = Rf + b(Rm-Rf)

where,

R = Required rate of return

Rf = Risk free rate of return

b = Beta of the security

Rm= return on the market

R = 5 + 0.75(12-5) = 10.25%

Stock B:

R = 5 + 0.90(12-5) = 11.3%

Stock C

R = 5 + 1.40(12-5) = 14.8%

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