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 BA350 Week 7 ... Assume that the risk-free rate... Security A has an expected...

# Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5, Security B has an expected return of 12%, a standard deviation of returns of 10%, a

BA350 Week 7

Questions

6-3 – Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5, Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?

7-2 – Two investors are evaluating General Electric’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years and the other normally holds stocks for 10 years. On the basis of the type of analysis done in this chapter, they should both be willing to pay the same price for General Electric’s stock. True or false? Explain.

Problems

6-2 – (Required rate of return)

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Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

6-6 – (Required rare of return)

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Suppose rRF = 5%, rM = 10%, and rA = 12%.

A.

Calculate Stock A’s beta.

B.

If Stock A’s beta were 2.0, then what would A’s new required rate of return?

C.

7-1 – (DPS Calculation)

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Thress Industries just paid a dividend of \$1.50 a share (i.e., D0 = \$1.50). The dividend is expected to grow 5% a year for the next 3 years and then 10% a year there-after. What is the expected dividend per share for each of the next 5 years?

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7-8 – (Preferred stock rare of return)

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What is the nominal rate of return on a preferred stock with a \$100 par value, a stated dividend of 8% of par, and a current market price of (a) \$60, (b) \$80, (c) \$100, and (d) \$140?

BA/350 Week 7

BA 350 Week 7

BA350 Week 7

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## BA/350 Week 7 Questions Solution (((***** 100% Correct All Sum Solution With Calculation *****)))

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6-3 – Security A has an xxxxxxxx return of xxx a standard deviation xx returns of xxxx a correlation xxxxxxxxxxx with xxx market xx -0.3, and x xxxx xxxxxxxxxxx of xxxxx xxxxxxxx x has an expected xxxxxx xx xxxx a xxxxxxxx deviation of xxxxxxx xx xxxx x correlation with the market of xxxx and x beta coefficient xx 1.0. Which security xx riskier? xxxx

Security A xx riskier because xx its xxxxx xxxx xxxxxxxxxxx xxxxxx and negative correlation xxxx other xxxxxxx xx may prove xx be x little xxxx xxxxx in xxxxxxxxxx xx xxxxxxxx xx A xxxxxxxx xx it xxx wider volatility of returns xxxx xxxxx in accordance to xxxxxx CAPM model is xxxx confirmed by xxxxxx beta xxxxxxxxxxxx xxxx xxx it xxx xxxx xxxxx volatility, xxxx in relative xxxxx xxxxxxxxx deviation) and in absolute xxxxx (standard xxxxxxxxx xxxxxxxxx xxxxxxxx xxxxxxxxx "a" xx xxxx xxxxxxx because risk xxx be xxxxxx into two xxxxxxxxx parts. xxxxxxxx xxxxx and company xxxxxxxx xxxxx The xxxxxxxx risk is low xxx xxx xxxxxxx

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