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Q19 & Q20. Use this equation to estimate the required return for TSLA stock. For simplicity, use the historic geometric returns as inputs in the
Q19 & Q20. Use this equation to estimate the "required return" for TSLA stock. For simplicity, use the historic geometric returns as inputs in the equation. That is, assume that the future returns for the S&P500 and the risk free rate are the same going forward as they have been in the past. Beginning Value Ending Value 12/31/1925 12/31/2019 Small stocks $1.00 $32,000.00 $1.00 $ 6,500.00 Large Stocks [S&P500] LT Government Bonds $1.00 $ 150.00 T-Bills $1.00 $ 25.00 Inflation $1.00 $ 15.00 16) Return on Large Stocks=(6500/1)^(1/(2019-1925))-1=9.7900% Return on Tbills=(25/1)^(1/(2019-1925)-1=3.4836% Market Risk Premium=Return on Large Stocks-Return on T- Bills=9.7900%-3.4836%=6.3064% 17 & 18) Required return=risk free rate+beta*market risk premium The risk-free rate is the return on government securities beta is the sensitivity of stock return with the market returns The market risk premium is the market returns-risk free rate Q19 & Q20. Use this equation to estimate the "required return" for TSLA stock. For simplicity, use the historic geometric returns as inputs in the equation. That is, assume that the future returns for the S&P500 and the risk free rate are the same going forward as they have been in the past. Beginning Value Ending Value 12/31/1925 12/31/2019 Small stocks $1.00 $32,000.00 $1.00 $ 6,500.00 Large Stocks [S&P500] LT Government Bonds $1.00 $ 150.00 T-Bills $1.00 $ 25.00 Inflation $1.00 $ 15.00 16) Return on Large Stocks=(6500/1)^(1/(2019-1925))-1=9.7900% Return on Tbills=(25/1)^(1/(2019-1925)-1=3.4836% Market Risk Premium=Return on Large Stocks-Return on T- Bills=9.7900%-3.4836%=6.3064% 17 & 18) Required return=risk free rate+beta*market risk premium The risk-free rate is the return on government securities beta is the sensitivity of stock return with the market returns The market risk premium is the market returns-risk free rate
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