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Name: _______________________ Class time: _________ FINA 351 HW 6 Due: Thursday April 21, 2016 before class 1. Roar Corp has a beta of 1.3. If the risk-free rate is 5% and the market risk premium is 9%, what is the expected return of Roar Corp? 2. Draw a capital market line (CML). Clearly 3. Draw a security market line (SML). Clearly mark the axes. mark the axes. 4. Based on careful research you forecast the following information over the next five years: The broader market (as benchmark) will increase by 3.71% per year; The annual T-bill rate is 2.2%; The S&P 500 index will earn an annual return of 2.29% with a market beta of 0.95. Is there any mispricing? If yes, how to take advantage of it? 1 Name: _______________________ Class time: _________ 5. Given the following information, if CAPM holds which security is overpriced and which is underpriced? Securities Kitty Parry Market Risk-free E(R) in % 12 13 11 5 Beta 1.0 1.5 6. Suppose Austin & Jack Corp has a market beta of 1.1 and a Treasury-bond beta of 0.8. The risk-free rate is 4%, the market risk premium is 7%, and that of the Treasury-bond portfolio is 2.5%. Under the two-factor security market line framework, what is the expected return for Austin & Jack Corp? 7. Suppose you estimate Google's market beta of 1.61, HML beta -0.02, SMB beta -1.05, RMW beta 0.92, and CMA beta -1.36. If the risk-free rate is 4%, expected market risk premium is 6%, expected HML return is 5%, expected SMB return is 3%, expected RMW return is 3%, and expected CMA return is 4%. Estimate Google's expected return. 8. Given expected market risk premium of 8%, risk-free rate of 6%. Gator Joe's Corp has a beta of 1.2 and you forecast that Gator Joe's stock is to earn 17.6% over the next year. What is its alpha based on your forecast? 2