Please show all work. Thanks! Albo Corp, a pharma company.has been recently eval

Question

Please show all work. Thanks!

Albo Corp, a pharma company.has been recently evaluated by financial analysts at Bowden-Frosh. Based on historical performance of the company during the past 5 years, they have concluded that a multi-factor model is a better estimator of the stock's returns. The two independent variables are: S&P500 premium and T-bond portfolio premium Beta associated with the S&P500 1.35 Beta associated with bond portfolio S&P500 risk premium Bond portfolio risk premium 3.5% Risk free rate 2.50% 0.65 8.5% Calculate the expected return on this stock.

Explanation / Answer

1. Computation of Expected Return of Stock

Expected Return = Risk Free Rate + Beta of S&P500 * S&P500 Risk Premium + Beta of Bond portfolio * Bond Portfolio Risk Premium

Expected Return = 0.025 + 1.35 * 0.085 + 0.65 * 0.035

Expected Return = 16.25%

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