11. The risk-free rate of return is 3.6 percent and the market rate of return is
ID: 2636245 • Letter: 1
Question
11. The risk-free rate of return is 3.6 percent and the market rate of return is 10.5 percent?
Which of the following statements are correct? Show Your Work.
Stock /Beta/ IRR
A /0.85 /9.2%
B /1.08/ 11.8%
C /1.69/ 15.3%
D /0.71 /7.8%
E /1.45/ 12.3%
a. I would choose to invest in Stocks A and E, because the market is efficient.
b. I would choose to invest in Stocks A and C, because the NPV is zero.
c. I would choose to invest in Stocks A, D and E, because the NPV is positive.
d. I would choose to invest in Stock B, because the NPV is positive.
e. I would not choose to invest in either of these stocks.
Explanation / Answer
In the above scenerio , investment should be made in B&C where IRR>Expected Return. So the answer is e.
Stock Expected Return IRR Remark Expeceted Return-A=3.6+(10.5-3.6)*0.85 9.465 9.2 Expeceted Return-B==3.6+(10.5-3.6)*1.08 11.052 11.8 Yes Expeceted Return-C==3.6+(10.5-3.6)*1.69 15.261 15.3 Yes Expeceted Return-D==3.6+(10.5-3.6)*0.71 8.499 7.8 Expeceted Return-E==3.6+(10.5-3.6)*1.45 13.605 12.3Related Questions
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