Anna is a Vice President at the J Corporation. The company is considering invest

Question

Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project, Anna must first calculate the rate of return that equity holders expect from the company stock. The   annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.0% and the market risk-premium is 2.5% . a) What is the beta of J Corp.'s stock? (1 Mark)(Round your answer to two decimal places) b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year? % (2 Mark)(Round your answer to one one-hundreth of a percent) Year J Corp. Return (%) Market Return (%) Enter your Final Answer Here 1 -4.64 -5.90 2 6.32 7.80 3 9.72 12.05 4 11.32 14.05 5 -13.92 -17.50 6 12.82 15.92 7 0.34 0.32 8 10.53 13.06 9 7.20 8.90 10 7.12 8.8 11 -4.25 -5.41 12 -7.52 -9.50 Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project, Anna must first calculate the rate of return that equity holders expect from the company stock. The   annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.0% and the market risk-premium is 2.5% . a) What is the beta of J Corp.'s stock? (1 Mark)(Round your answer to two decimal places) b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year? % (2 Mark)(Round your answer to one one-hundreth of a percent) Year J Corp. Return (%) Market Return (%) Enter your Final Answer Here 1 -4.64 -5.90 2 6.32 7.80 3 9.72 12.05 4 11.32 14.05 5 -13.92 -17.50 6 12.82 15.92 7 0.34 0.32 8 10.53 13.06 9 7.20 8.90 10 7.12 8.8 11 -4.25 -5.41 12 -7.52 -9.50

Explanation / Answer

Year J Corp. Return (%) Market Return (%) 1 -4.64 -5.9 2 6.32 7.8 3 9.72 12.05 4 11.32 14.05 5 -13.92 -17.5 6 12.82 15.92 7 0.34 0.32 8 10.53 13.06 9 7.2 8.9 10 7.12 8.8 11 -4.25 -5.41 12 -7.52 -9.5 covariance 86.24789167 Variance of market returns 117.6024083 beta of the security covariance between security to market return/variance of Market 0.73338542 Expected rate of return on J corporation Ke= IRF + (risk premium)*beta 1.843463551 percent

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