Suppose that the Treasury bill rate is 6% rather than 4%. Assume that the expect

Question

Suppose that the Treasury bill rate is 6% rather than 4%. Assume that the expected return on the market stays at 12%. Use the following information.

Calculate the expected return from Pfizer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume that the expected market return stays at 12%. Would Ford offer a higher or lower expected return if the Treasury bill interest rate was 6% rather than 4%?

Suppose that the Treasury bill rate is 6% rather than 4%. Assume that the expected return on the market stays at 12%. Use the following information.

Explanation / Answer

Using CAPM model

a)

Exp return = 6+.55*(12-6) = 9.3%

b)

Expected highest return is of Dow chemical i.e 19.62%

c) Lowest is of Heinz and Pfizer i.e 9.3%

d)

ford return @6% = 16.08%

ford return at 4% = 4+1.68*(12-4)= 17.44%

lower return at 6% rather than 4%

e)

walmart return @8% = 8+.95*(12-8) = 11.8%

Stock beta Rf Rm exp r   Dow Chemical 2.27 6 12 19.62   Bank of America 2.2 6 12 19.2   Ford 1.68 6 12 16.08   Exxon Mobil 1.7 6 12 16.2   Starbucks 1.77 6 12 16.62   IBM 1.23 6 12 13.38   Newmont Mining 0.99 6 12 11.94   Pfizer 0.55 6 12 9.3   Walmart 0.95 6 12 11.7   Heinz 0.55 6 12 9.3

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