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.)

Assume that the expected market return stays at 14%. Would C offer a higher or lower expected return if the Treasury bill interest rate was 5% rather than 3%?

  Stock Beta ()   A 2.41         B 2.00         C 1.56         D 1.46         E 1.49         F 1.11         G 0.83         H 0.75         I 0.75         J 0.45      

Explanation / Answer

a)

Required return (CAPM) = Rf+×Rp

Rf is risk free return

is beta of the security

Rp is risk premium

= 5%+0.75×(14%-5%)

= 11.75%

b)

Required return (CAPM) = Rf+×Rp

Rf is risk free return

is beta of the security

Rp is risk premium

Stock A has highest beta, so it will give highest expected return.

= 5%+2.41×(14%-5%)

= 26.69%

c)

Required return (CAPM) = Rf+×Rp

Rf is risk free return

is beta of the security

Rp is risk premium

Stock J has highest beta, so it will give highest expected return.

= 5%+0.45×(14%-5%)

= 9.05%

d)

Stock C has lower beta than Stock A, so it will offer lower expected return.

e)

Stock I has lower beta than Stock A, so it will offer lower expected return.

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