Risk and Return Homework – FIN 331 What is the expected return on an investment
ID: 2617997 • Letter: R
Question
Risk and Return Homework – FIN 331
What is the expected return on an investment with the following probable payoffs?
Probability Payoff
15% 30.0%
55% 5.0%
30% - 2.0%
You are an average risk-averse investor considering the purchase of three stocks. Which should you purchase and why?
Stock Expected Return Standard Deviation
A 6.0% 4.0%
B 18.0% 12.0%
C 12.0% 7.0%
The risk-free rate of return is currently 2%. The expected return on the market is 8%. You are analyzing a stock with a beta of 1.05. What is the required rate of return on this stock using the CAPM approach?
The current risk-free rate is 3.5%. The market risk premium is 7%. Techno Electronics, with a beta coefficient of 0.9, is currently selling for $28 per share. The company is expected to grow at 4% constantly forever. The last dividend paid to stockholders was $1.75 per share. Is Techno Electronics stock correctly priced? Explain.
Risk and Return Excel Assignment
Go to finance.yahoo.com. You should see a quote lookup box on right side. In this box, enter the ticker symbol for Microsoft which is MSFT. Then after the information for the company comes up you will be able to select “historical data”. This tab will allow you to download historical pricing information. Enter the start date and ending dates January 2, 2017 through January 2, 2018 in the appropriate box. Select “daily” to get daily data then press “apply”. Then select to “download to spreadsheet” which will download the information to an Excel spreadsheet.
Do the same process for NFLX, Netflix. Then again do the same for ^DJI to pull up the data for the Dow Jones Industrial Average which represents the market index.
You want to work with the adjusted closing price column for each of the stocks and stock index. You can copy that one column from NFLX and from the DJI into the Microsoft worksheet, so you can easily copy the equations.
You need the daily returns for all three stock columns. To get these values, you will take the:
(adjusted close for one day – adjusted close for the previous day)/adjusted close for the previous day.
Explanation / Answer
Answer A)
Answer b)
A risk averse investor prefers lower returns with low risks. so from the given stocks and information
Stock Expected Return Standard Deviation
A 6.0% 4.0%
B 18.0% 12.0%
C 12.0% 7.0%
He will prefer stock A with low risk rate.
Answer C)
risk-free rate of return (rf) = 2%. expected return on the market(RM)= 8%. beta (B)= 1.05.
Required return ( R) = rf + B (RM-rf ) = 2 + 1.05 *6 = 8.30%
Answer D)
risk-free rate of return (rf) = 3.5%. market risk premium (RM - rf)= 7%. beta (B)= 0.9.
Required return ( R) = rf + B (RM-rf ) = 3.5 + 0.9 * 7 = 6.8%
Current Market Price (Po) = 28 , Growth rate (g) = 4% , Dividend for current year (D0) = 1.75,Future value ( V) =? , K =6.8% ( calculated in CAPM)
Based on Gordan dividend constant growth rate model , V = D0(1+g) / K-g
= 1.75( 1.04) /( 0.068 - 0.04) =65
As , P0 not equal to calculated price .So, the stock is not correctly Priced
Answer of excel assignment
Probability(P) payoff(PO) P * PO 0.15 30 4.5 0.55 5 2.75 0.3 -2.0 -0.6 Expected return 6.65%Related Questions
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