Suppose that the Treasury bill rate is 5% rather than 3%. Assume that the expect

Question

Suppose that the Treasury bill rate is 5% rather than 3%. Assume that the expected return on the market stays at 14%. Use the following information.

Calculate the expected return from H. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.

Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Suppose that the Treasury bill rate is 5% rather than 3%. Assume that the expected return on the market stays at 14%. Use the following information.

Explanation / Answer

Expected return using CAPM model can be calculated as follows

Expected Return = Risk Free rate + Beta * (Market Return - Risk free return )

a) Expected return of H = 5% + 0.71 * (14% - 5%) = 5% + 0.71 * 9% = 11.39%

Expected returns of all stocks are calculated in the below table similarly

b. From the table above, highest return is offered by A which is 26.24%

c. From the table above, lowest return is offered by J which is 8.78%

Stock Beta Expected Return A 2.36 26.24% B 1.95 22.55% C 1.53 18.77% D 1.4 17.60% E 1.42 17.78% F 1.08 14.72% G 0.79 12.11% H 0.71 11.39% I 0.7 11.30% J 0.42 8.78%

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