1.) A stock had returns of 11 percent, 23 percent, and 5 percent for the past 3

Question

1.)

A stock had returns of 11 percent, 23 percent, and 5 percent for the past 3 years. Based on these returns, what is the probability that this stock will earn at least 40.51 percent in any one given year?

2.)

The expected return on HiLo stock is 14.80 percent while the expected return on the market is 13.8 percent. The beta of HiLo is 1.27. What is the risk-free rate of return?

A stock had returns of 11 percent, 23 percent, and 5 percent for the past 3 years. Based on these returns, what is the probability that this stock will earn at least 40.51 percent in any one given year?

2.5 percent 1.0 percent 5.0 percent 16.0 percent 0.5 percent

2.)

The expected return on HiLo stock is 14.80 percent while the expected return on the market is 13.8 percent. The beta of HiLo is 1.27. What is the risk-free rate of return?

11.37 percent 2.34 percent 10.10 percent 5.05 percent 1.00 percent

Explanation / Answer

Answer for question no.1:

Mean of the returns given = (11+23+5)/3 =13

Standard deviation of the values =stdev.s() function of excel =9.165151

Probability that return would be atleast 40.51 is P(40.51) = x-mean/stand.dev

=40.51-13/9.165151

=0.0013

Answer for question no.2:

Formula for calculation of the expected return using CML model is as follows:

Ke=Rf+beta(Rm-Rf)

Given Ke = 14.80%

Rm=Expected return on market =13.8%

Beta =1.27

Substituting the values in the formula:

14.80 = Rf+1.27(13.8 - Rf)

0.27Rf =17.526 -14.80

Rf = 2.726/0.27

Rf= 10.096 rounded to 10.1%

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