Just for IdeaView more random threads:
- MTH202 Discrete Mathematics GDB No. 1 Solution Fall...
- MTH301 GDB IDEA SOLUTIONS fall 2010
- MGT411 GDB2 Deadline 25 June 2010
- FIN623 Taxation Management GDB 2 Spring 2012 Solution
- ECO401 - Economics 2nd GDB Solution Semester 2014
- FIN621, 1st GBD Discussion and solution Fall Semester 21st...
- MGT402 GDB Solution 12 November 2011
- MGMT625 GDB Idea Solution 28 July 2010
- ISL201 Islamic Studies Solution & Discussion Fall November...
- STA630 Reacher methods GDB Solution May13,2010
A year ago, you have purchased some stock with beta of 0.6. You have not noticed how well
your stock has done during the year, but you do know what the T-bills rate has remained 10% throughout the year. As you are reading the financial journal, you have noticed that the
market risk premium for average stock is 5% during the year. Given only this information:
a) What do you require the return on your stock?
Referance:
Handouts page 107 Lecture 24
SMl Linera Equation for the required retun of any stock A:
rA=rRF+(rM-rRF)βA
In the above formula
rA= Return that Inverstors Required from Investment in Stock A.
rRF= Risk Free Rate of Return (i.e. T-Bill ROR).
rM= Return that Investor Require from Investment in an Average Stock (or the market
Sponsored Links
Portfolio of All Stock where βM = +1.0 always).
βA= Beta for stock A. (rM - rRF) βA= Risk Premium or additional return Required in
Excess of Risk Free ROR to compensate the Investor for the Additional Market Risk of the
Stock
a) What fo you require the return on your stock?
rA = rRF + (rM - rRF) beta
rA= ?
rRF = 10%
rM- rRF = 5%
Beta = 0.6
rA = 10% + (5%) 0.6
rA = 10% + 3%
rA = 13%
So Reqiured rate of Return is 13%
Rm - RRF = Market Premium risk.... so it is already given in GDB question no need to do 15 - 10 or 10 - 15
b) Comment whether you will still hold stock, if the market return is 15%?Reference
Handouts page 111 Lecture 25
SML-Numerical Example:
Calculate the required rate of return for stock A given the following data:
βA=2.0 (i.e. Stock A is Twice as risky as the Market)
rM=20% pa (i.e AMarket ROR or ROR on a portfolio consisting of All Stocks or ROR on
the "Average stock")
rRF=10% pa (i.e. T-Bill ROR)
SML Equation (assumes Efficient Stock Pricing, Risk and Return)
rA=rRF+(rM-rRF)βA
=10%+(20%-10%)(2.0)=30%
Interpretation of Result:
Investors require a 30% pa Return from Investment in Stock A. This is higher than the Market ROR because the Stock (Beta=2.0) is Riskier than the Market (Beta=1.0 always).
If Required Return (30%) is higher than Expected Return (20%) it means that Stock A is Unlikely to Achieve the Investors Requirement and Investors will Not Invest in Stock A
Last edited by viki; 06-26-2010 at 04:08 PM.
:o:o--------------------------------------------------------------------------------------:o:o
[B]The more knowledge you have, the greater will be your fear of Allah.[/B]
Please Join My [B]Group Vuhelp[/B][B], Birthday Wishing, Daily Hadees[/B] [CODE][B]http://vuhelp.net/groups/vuhelp.html[/B]
[B]http://vuhelp.net/groups/birthday-wishing.html[/B]
[B]http://vuhelp.net/groups/daily-hadees.html[/B][/CODE]
[CENTER][B][COLOR="Red"][SIZE="4"]Email: [email]viki@vuhelp.net[/email][/SIZE][/COLOR][/B][/CENTER]
There are currently 1 users browsing this thread. (0 members and 1 guests)