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 15%. 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.)

Assume that the expected market return stays at 15%. Would C offer a higher or lower expected return if the Treasury bill interest rate was 5% rather than 3%?

Suppose that the Treasury bill rate is 5% rather than 3%. Assume that the expected return on the market stays at 15%. Use the following information.

Explanation / Answer

Using the CAPM model, expected return can be calculated as follows

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

1) Return of H = 5%+1.19 * (15%-5%) = 16.90%

Similarly all the returns are calculated in the following table

2) Highest return is paid by A, which is 31.00%

3) Lowest return is paid by I, which is 12.80%

4) Return of C when Treasury bill is 5%, is 23.90% (From the above table)

Return of C when Treasury bill is 3% = 3%+1.89*(15%-3%) = 25.68%

If treasury return is 5% rather than 3%, C offers lower returns.

5) Return of I when Treasury bill is 5%, is 18.00% (From the above table)

Return of I when Treasury bill is 8% = 8%+1.89*(15%-8%) = 17.10%

If treasury return is 5% rather than 8%, I offers higher returns.

Stock Beta Expected Return A 2.60 31.00% B 2.40 29.00% C 1.89 23.90% D 2.12 26.20% E 2.26 27.60% F 1.44 19.40% G 1.27 17.70% H 1.19 16.90% I 1.30 18.00% J 0.78 12.80%

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