Question
Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas
Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2 (p. 193) - also provided below.
a. Calculate the expected return from Dell.
b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Answers: | ||||
Formula | Calculation | |||
A. Dell's expected return | Rf + (Beta (Rm - Rf)) | |||
B./C. | ||||
Stock | Beta (B) | Revised T Bill Risk-Free Rate | Market Return | Expected return |
Amazon | 2.16 | F | F | C |
Ford | 1.75 | F | F | C |
Dell | 1.41 | F | F | C |
Starbucks | 1.16 | F | F | C |
Boeing | 1.14 | F | F | C |
Disney | 0.96 | F | F | C |
Newmont | 0.63 | F | F | C |
Exxon Mobil | 0.55 | F | F | C |
Johnson & Johnson | 0.5 | F | F | C |
Campbell Soup | 0.3 | F | F | C |
B. Highest | T | |||
C. Lowest | T | |||
D. FORD will offer a ________ expected return at 6%. | Higher or lower? | |||
Interest rate | 4% | 6% | ||
Rate of return | C | C | ||
E. Exxon will offer a _______ expected return at 8%. | Higher or lower? | |||
Interest rate | 4% | 8% | ||
Rate of return | C | C |
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