Question
Q5. a) A share of stock with a beta of .95 now sells for $50. Investors expect the stock to pay a year-end dividend of
Q5. a) A share of stock with a beta of .95 now sells for $50. Investors expect the stock to pay a year-end dividend of $2.80. The T-bill rate is 15 percent, and the market risk premium is 8 percent. If the stock is perceived to be fairly priced today, what must be investors expectations of the price of the stock at the end of the year? b) The following table shows betas for several companies. Calculate each stocks expected rate of return using CAPM. Assume the risk free rate of interest is 15 percent. Use a 8 Percent risk premium for the market portfolio. Company Beta DGKC 2.45 LUCK 1.80 PSO 0.90 DFML 0.20 c) If the expected rate of return on the market portfolio is 25 percent and T- bills yield is 15 percent, what must be the beta of a stock that investors expect to return 29 percent? d) You have equal investment in all four stocks given in part (b)of this question. What would be your portfolio beta? e) Student practice: Suppose you have investment as follows: DGKC 20% LUCK 20% PSO 20% DFML 40% Take the Beta as given above and calculate your portfolio beta.
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