Supposed the Treasury bill rate were 6% rather than 4%. Assume taht the expected
ID: 2668072 • Letter: S
Question
Supposed the Treasury bill rate were 6% rather than 4%. Assume taht the expected return on the market stays at 10%. Use the betas in table 8.2.
TABLE 8.2
Stock Beta Expected Return
Amazon 2.16 15.4
Ford 1.75 12.6
Dell 1.41 10.2
Starbucks 1.16 8.4
Boeing 1.14 8.3
Disney .96 7.0
Newmont .63 4.7
Exxon Mobil .55 4.2
Johnson &Johnson .50 3.8
Campbell Soup .30 2.4
A. Calculate the expected return from Dell.
B. Find the highest expected return that is offered by one of the these stocks.
C. Find the lowest expected return that is offered by one of these stocks.
D. Would Ford offer a gigh or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
E. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Explanation / Answer
ER = (risk free return) + (Beta) x (expected market return – risk free return) A. 6 +1.41*(10.2-6) =11.922 percent b. 6+2.16*(15.4-6) =26.304 percent c. 6+.3*(2.4-6) =4.92 percent d. 6+1.75*(12.6-6) =11.55 At 4 +1.75*(8.6) =16.47 So higher will be at 4 percent d. At 8% return = 8 +.55*3.8 =10.09 At 6% 6 +.55*1.8 =6.99 So at 8% it will be higher
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