Use the CAPM to compute the reasonable return for each of these fashion related
ID: 2807697 • Letter: U
Question
Use the CAPM to compute the reasonable return for each of these fashion related stocks Use 0.5% as the risk free rate of return use 5.5% as the market rate of return. Retrieve beta from Yahoo Finance at http://finance yahoo.com/ or use Google. (please indicate which website you retrieved Beta from) 1. a. b. c. PVH Corp (PVH) Tiffany (TIF) Guess? (GES) 2. Use the CAPM to compute the reasonable return for each of these stocks. Use risk free rate of return and the market rate of return given in #1, above. d. Coca Cola (KO) e. Walmart (WMT) f McDonald's (MCD) 3. Why do the returns you computed above represent a reasonable (or fair) return for each stock? The required return for each stock? a. b. What do you notice about the pattern or trend of returns for the fashion companies (in #1) as compare to those of the non-fashion companies (in #2)? Why does that occur? Does that make sense in terms of the line of business of the companies in the respective groups? 4.Explanation / Answer
1-
company
beta
risk free rate
market return
required return = risk free rate+(market return-risk free rate)*beta
PVH
0.51
0.5
5.5
.5+(5.5-.5)*.51
3.05
TIF
1.77
0.5
5.5
.5+(5.5-.5)*1.77
9.35
ges
-0.1
0.5
5.5
.5+(5.5-.5)*-.10
0
2-
company
beta
risk free rate
market return
required return = risk free rate+(market return-risk free rate)*beta
PVH
0.58
0.5
5.5
.5+(5.5-.5)*.58
3.4
TIF
0.11
0.5
5.5
.5+(5.5-.5)*.11
1.05
ges
0.82
0.5
5.5
.5+(5.5-.5)*.82
4.6
3-
A
reasonable return on each stock
because this return in relation with the market risk attached with the stock and at this rate of return, the stock would be correctly priced.
B
required return on each stock
this is called the required return because investor should earn a minimum return on investment in relation with the risk attached with the investment
4-
the change in return of companies in 1 &2 are due to their market risk and group of companies or line of business does not bother in this situation as it is market risk which is non diversifiable
1-
company
beta
risk free rate
market return
required return = risk free rate+(market return-risk free rate)*beta
PVH
0.51
0.5
5.5
.5+(5.5-.5)*.51
3.05
TIF
1.77
0.5
5.5
.5+(5.5-.5)*1.77
9.35
ges
-0.1
0.5
5.5
.5+(5.5-.5)*-.10
0
2-
company
beta
risk free rate
market return
required return = risk free rate+(market return-risk free rate)*beta
PVH
0.58
0.5
5.5
.5+(5.5-.5)*.58
3.4
TIF
0.11
0.5
5.5
.5+(5.5-.5)*.11
1.05
ges
0.82
0.5
5.5
.5+(5.5-.5)*.82
4.6
3-
A
reasonable return on each stock
because this return in relation with the market risk attached with the stock and at this rate of return, the stock would be correctly priced.
B
required return on each stock
this is called the required return because investor should earn a minimum return on investment in relation with the risk attached with the investment
4-
the change in return of companies in 1 &2 are due to their market risk and group of companies or line of business does not bother in this situation as it is market risk which is non diversifiable
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