1) A stock has a beta of 1.30, the expected return on the market is 10 percent,

Question

1) A stock has a beta of 1.30, the expected return on the market is 10 percent, and the risk-free rate is 4.6 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  Expected return

%

2) You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 17 percent, –15 percent, 19 percent, 29 percent, and 10 percent. Suppose the average inflation rate over this period was 2.6 percent and the average T-bill rate over the period was 4.3 percent.

a.

What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  Average real return

%

b.

What was the average nominal risk premium on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

  Average nominal risk premium

%

1) A stock has a beta of 1.30, the expected return on the market is 10 percent, and the risk-free rate is 4.6 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

1)

As per CAPM

Expected return = risk-free rate + ( expected return on the market - risk-free rate)*beta

Expected return = 4.6 + (10-4.6)*1.30

Expected return = 11.62%

2)

a)

Average Return = (17 -15 + 19+29+10)/5

Average Return =12%

Average real return = (1+ nominal Return)/(1+ average inflation rate) - 1

Average real return = (1+12%)/(1+2.6%) -1

Average real return = 9.16%

b)

Average nominal risk premium = Average Return - Risk free rate

Average nominal risk premium = 12% - 4.3%

Average nominal risk premium = 7.70%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.