A small market consists of three stocks, A, B, and C. and their financial data and projection are presented below. Assume CAPM holds.StockNumber of sharesStock PriceBetaA750331.2B220510.8C460191.4Economic conditionProbabilityABCBoom20%20%22%23%Normal50%15%10%12%Recession30%2%5%7%Find:the expected return on the market using portfolio beta if Rf=5%.

Answered: A small market consists of three…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 1P: Your investment club has only two stocks in its portfolio. 20,000 is invested in a stock with a beta...

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Similar questions

An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
A stock is trading at $80 per share. The stock is expected to have a yearend dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL?
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?

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Stock	Number of shares	Stock Price	Beta
A	750	33	1.2
B	220	51	0.8
C	460	19	1.4

Economic condition	Probability	A	B	C
Boom	20%	20%	22%	23%
Normal	50%	15%	10%	12%
Recession	30%	2%	5%	7%