3. Newmont Mining (NYSE: NEM) has an estimated beta of 0.2. The of risk-free ret

Question

3. Newmont Mining (NYSE: NEM) has an estimated beta of 0.2. The of risk-free return is 4.5 percent, and the equity risk premium is estimated to be 7.5 the CAPM, calculate the required rate of return for investors in NEM. rate percent. Using 4. A Canada-based investor buys shares of Toronto-Dominion Bank (Toronto: D.TO) for C$72.08 on 15 October 2007, with the intent of holding them for a year. The dividend rate is C$2.11 per year. The investor actually sells the shares on 5 November 2007, for C$69.52. The investor notes the following additional facts: i. No dividends were paid between 15 October and 5 November. ii. The required return on TD.TO equity was 8.7 percent on an annual basis and 0.161 percent on a weekly basis. A. State the lengths of the expected and actual holding periods. B. Given that TD.TO was fairly priced, calculate the price appreciation return (capital gains yield) anticipated by the investor given his initial expectations and initial expected holding period. C. Calculate the investor's realized return. D. Calculate the realized alph

Explanation / Answer

Solution 3.

Newnont Mining

Calculation of Required Rate of Return Using CAPM

Formula: E(R) =R (f) +B[R (m) – R (f)]

Where,

E(R) is the Required Rate of Return

R (f) is the risk free rate of Return, i.e. 4.5%

B is the beta of NEM, i.e. (-) 0.2

R (m) – R (f) is the risk premium, i.e. 7.5%

Therefore,

E(R) = 4.5% + [-0.2*7.5%]

        = 3%. (Answer)            

Solution 4.

A. The expected holding was one year. The actual holding period was from 15 October 2007 to 5 November 2007, which is three weeks.

B. Given fair pricing, the expected return equals the required return, 8.7 %.

The expected price appreciation return over the initial anticipated one year holding period must be equal to the required return minus the dividend yield,

(2.11/72.08)*100 = 2.93 %.

Thus expected price appreciation return = 8.7% – 2.93%

   =5.77 %.

C. The realized return of investor =

[($69.52 – $72.08)/$72.08]*100

(-) 3.55 % over three weeks.

There was no dividend yield return over the actual holding period.

D. The required return over a three - week holding period was (1.00161) 3 – 1 = 0.484 %

Using the answer to C, the realized alpha = (–) 3.552 (–) 0.484 = (–) 4.04 %

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