INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 9, Problem 2CP
Summary Introduction
To calculate: The presumed
Introduction: The expected return is the benefit or loss, an investor envisions on speculation that have known or foreseen paces of return.The expected return for a financial speculation is the expected value of its return. It is a proportion of the centre of the arbitrary variable that is the return.
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Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4 percent, the expected return on the market is 11.5 percent, and the betas of the two stocks are 1.2 and .9, respectively. Landon’s own forecasts of the returns on the two stocks are 13.75 percent for Furhman Labs and 10.50 percent for Garten. Calculate the required return for each stock. Is each stock undervalued, fairly valued, or overvalued?
Wilson is now evaluating the expected performance of two common stocks, Furhman Labs Inc. and Garten Testing Inc. He has gathered the following information:∙ The risk-free rate is 5%.∙ The expected return on the market portfolio is 11.5%.∙ The beta of Furhman stock is 1.5.∙ The beta of Garten stock is .8.Based on his own analysis, Wilson’s forecasts of the returns on the two stocks are 13.25% for Furhman stock and 11.25% for Garten stock. Calculate the required rate of return for Furhman Labs stock and for Garten Testing stock. Indicate whether each stock is undervalued, fairly valued, or overvalued.
Nishikori is now evaluating the expected performance of 2 common stocks. AOA Labs Inc and YLC Inc. He has gathered the following information:
The risk-free rate is 4%
The expected return on the market portfolio is 12%
The beta of AOA Labs Inc stock is 1.7
The beta of YLC Inc stock is 0.7
Based on his own analysis, Nishikori’s forecasts of the returns on the stocks are 13.5% for AOA Labs Inc and 11% for YLC Inc stock. Calculate the required rate of return for AOA Labs Inc stock and YLC Inc stock. Which investment is better?
Chapter 9 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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