Question
You have a portfolio made up of the following holdings: 3,000 shares of Ding Ltd, 2,500 shares of Slam and 5,000 shares of Nacho Ltd.
You have a portfolio made up of the following holdings: 3,000 shares of Ding Ltd, 2,500 shares of Slam and 5,000 shares of Nacho Ltd. The Betas for the stocks are 1.4, 0.8 and 1.2, respectively. As well, the current dividends per share for the three companies are $0.30, $0.40, and $0.50, respectively. The Market Risk premium is 7.0% and government bonds yield 2.0%. Calculate the expected annual return on your portfolio. The dividend growth rates are 5%, 4% and 3%, respectively (Ding, Slam and Nacho). The share prices for the stocks are as follows: Ding $5.00, Slam $9.00 and Nacho $11.00 per common share. a) Calculate the expected annual return on the portfolio b) Calculate whether each stock's actual expected return is: (1) above, (2) below or (3) on the Security Market Line (SML)
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