The following table shows the sensitivity of four stocks to the three Fama–French factors. Assume the interest rate is 2%, the expected risk premium on the market is 5%, the expected risk premium on the size factor is 2.9%, and the expected risk premium on the book-to-market factor is 4.7%. Ford Walmart Citigroup Apple Market 1.34 0.74 1.15 1.35 Size −0.17 −0.46 −0.42 −0.57 Book-to-market 0.86 −0.37 0.95 −0.62 Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

The following table shows the sensitivity of four stocks to the three Fama–French factors. Assume the interest rate is 2%, the expected risk premium on the market is 5%, the expected risk premium on the size factor is 2.9%, and the expected risk premium on the book-to-market factor is 4.7%. Ford Walmart Citigroup Apple Market 1.34 0.74 1.15 1.35 Size −0.17 −0.46 −0.42 −0.57 Book-to-market 0.86 −0.37 0.95 −0.62 Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 14P

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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?
he following table shows the sensitivity of four stocks to the three Fama-French factors. Assuming that the interest rate is 5%, the expected risk premium on the market is 8%, the expected risk premium on the size factor is 3.8%, and the expected risk premium on the book-to-market factor is 3.8%. Ford Walmart Citigroup Apple Market 1.43 0.92 1.24 1.44 Size −0.26 −0.37 −0.51 −0.64 Book-to-market 0.67 −0.28 1.04 −1.02 Calculate the expected return on each stock.
The following table shows the sensitivity of four stocks to the three Fama–French factors. Estimate the expected return on each stock assuming that the interest rate is 2%, the expected risk premium on the market is 7%, the expected risk premium on the size factor is 3.2%, and the expected risk premium on the book-to-market factor is 4.9%.
The following information relates to five stocks listed in five different sectors at the Nairobi SecuritiesExchange .The return on treasury bills is 8% and the average return in the market has been found to be13%. Using the capital asset pricing model (CAPM) determine the Required Rate of Return (RRR) for eachstock and state whether it is undervalued or overvalued.
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the systematic risk of each stock?
An investor has conducted research on two individual stocks, high-risk (H) and low-risk (L), and the market with the following characteristics: Regarding risk-free rate, the lending rate is 2% and the borrowing rate is 5%. The investor can borrow a maximum of £50,000. He also assumes that non-market movements between stocks H and L are uncorrelated. a) Using the CAPM and the lending rate, calculate the alphas for stocks H and L. Indicate which stocks are over-/under- or correctly priced b) Construct an arbitrage portfolio by first leveraging stock L to match the beta of stock H. Calculate the return difference between the long and short portfolios. (Note: Leveraging means using margin purchase.)
The following information describes the expected return and risk relationship for the stocks of two of WAH’s competitors. Stock X 12.0% 20% 1.3 Stock Y 9.0 15 0.7 Market Index 10.0 12 1.0 Risk-free rate 5.0 Using only the data shown in the preceding table: Draw and label a graph showing the security market line, and position Stocks X and Y relative to it. Compute the alphas both for Stock X and for Stock Y. Show your work. Assume that the risk-free rate increases to 7 percent, with the other data in the preceding matrix remaining unchanged. Select the stock providing the higher expected risk adjusted return and justify your selection. Show your calculations.
The following four macro-economic factors were identified regarding a stock As returns, the stock sensitivity to each factor and the related risk premium associated with each factor have been calculated as follows: Gross domestic product (GDP) growth=0.6 RP=4% Inflation rate= 0.8, RP=2% Platinum prices=-0.7, RP= 5% Standard and Poor’s 500 index return= 1.3 RP=9% The risk free rate is 3% Calculate the expected rate of return using the Arbitrage pricing theory formula.
The data below describes a three-stock financial market that satisfies the single index model. Stock Capitalization Beta Mean Excess Return Standard Deviation A £3,000 1.0 10% 40% B £1,940 0.2 2% 30% C £1,360 1.7 17% 50% The standard deviation of the market index portfolio is 25%. What is the mean excess return of the index portfolio? What is the covariance between stock A and stock B? What is the covariance between stock B and the index? Break down the variance of stock B into its systematic and firm specific components.
An analyst collected the following data for three possible investments. The expected return on the market is 12% and the risk-free rate is 4%. According to the security market line (SML), which of the three securities is correctly priced? 1)Alpha Stock : Price Today : 25 Forecast price : 31 Dividend : 2 Beta : 1.6 2)Omega Stock : Price Today : 105 Forecast price : 110 Dividend : 1 Beta : 1.2 3)Lambda Stock : Price Today : 10 Forecast price : 10.8 Dividend : 0 Beta : 0.5
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.0% 5.0% 2 0.5 20 32 15 If the T-bill rate is 7%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
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 2.0%, and the return on the HML portfolio (rHML) is 5.1%. If ai = 0, bi = 1.2, ci = -0.4, and di = 1.3, what is the stock's predicted return? Do not round intermediate calculations. Round your answer to two decimal places.