Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit. 7. Forecasted Returns, Standard Deviations, and Betas Stock X Stock Y Market index Risk-free rate Forecasted Return 14.0% 17.0 14.0 5.0 Standard Deviation 36% 25 15 Beta 0.8 1.5 1.0 a. Calculate expected return and alpha for each stock b. Identify and justify which stock would be more appropriate for an investor who wants to: i. Add this stock to a well-diversified equity portfolio ii. Hold this stock as a single-stock portfolio 8, suppose the real interest rate is 3% per year, and the expected inflation rate is 896. What is the nominal interest rate? Suppose the expected inflation rate rises to 10%, but the real rate is unchanged. What happens to the nominal interest rate? Based on five years of monthly data, you derive the following information for the companies listed: 9. Com Intel Ford Anheuser Busch Merck S&P 500 a(Interc 0.22 0.10 0.17 0.05 0.00 12.10% 14.60 7.60 10.20 5.50 0.72 0.33 0.55 0.60 1.00 a. Compute the beta coefficient for each stock b. Assuming a risk-free rate of 8 percent and an expected return for the market portfolio of 15 percent, compute the expected (required) return for all the stocks and plot them on the SML. c. Plot the following estimated returns for the next year on the SML and indicate which stocks are undervalued or overvalued Intel-20 percent Ford-15 percent Anheuser Busch-19 percent . Merck-10 percent Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit. 7. Forecasted Returns, Standard Deviations, and Betas Stock X Stock Y Market index Risk-free rate Forecasted Return 14.0% 17.0 14.0 5.0 Standard Deviation 36% 25 15 Beta 0.8 1.5 1.0 a. Calculate expected return and alpha for each stock b. Identify and justify which stock would be more appropriate for an investor who wants to: i. Add this stock to a well-diversified equity portfolio ii. Hold this stock as a single-stock portfolio 8, suppose the real interest rate is 3% per year, and the expected inflation rate is 896. What is the nominal interest rate? Suppose the expected inflation rate rises to 10%, but the real rate is unchanged. What happens to the nominal interest rate? Based on five years of monthly data, you derive the following information for the companies listed: 9. Com Intel Ford Anheuser Busch Merck S&P 500 a(Interc 0.22 0.10 0.17 0.05 0.00 12.10% 14.60 7.60 10.20 5.50 0.72 0.33 0.55 0.60 1.00 a. Compute the beta coefficient for each stock b. Assuming a risk-free rate of 8 percent and an expected return for the market portfolio of 15 percent, compute the expected (required) return for all the stocks and plot them on the SML. c. Plot the following estimated returns for the next year on the SML and indicate which stocks are undervalued or overvalued Intel-20 percent Ford-15 percent Anheuser Busch-19 percent . Merck-10 percent
