Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expe

Question

Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays 10%.
STOCK BETA (ß) EXPECTED RETURN [r_f+ ß(r_m- r_f)]
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

Calculate the expected return from dell.
Find the highest expected return that is offered by one of these stocks.
Find the lowest expected return that is offered by one of these stocks.
Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.

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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