Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table

Question

Suppose that the Treasury bill rate is 6% rather than 3%, as we assumed in Table 121 but that the expected return on the market is still 10%. Use the betas in that table to answer the following questions a. Calculate the expected return from Pfizer. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Expected return . b. What is the highest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Expected return c. What is the lowest expected return offered by one of these stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place Expected return

Explanation / Answer

Treasury bill rate, Rf = 6%

Expected market return, Rm = 10%

Beta of Pfizer stock = 0.90

Expected return of Pfizer stock = Rf + Beta * (Rm - Rf)

= 6% + 0.90 *(10% - 6%)

= 6% + 3.6%

= 9.6%

If we want highest return we should ready to take high risk, since high risk stock will give high return and vice versa..

Hence in the given data high return stock is U.S steel and low return stock is PG&E stock.

Highest expected return = 6% + 1.85*(10% - 6%)

= 6% + 7.4%

= 13.4%

Lowest expected return = 6% + 0.23*(10% - 6%)

= 6% + 0.92%

= 6.92%

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