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    Minh Phương
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    7 views6 pages

    c7 - 2

    Uploaded by

    Minh Phương

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 6
    TRASH Tig TTD E TES Home / Questions / finance 1 Consider the following table, which gives a security analysts expected return on two stacks in two particular scenarios forthe rate of Search answers here Question =) ‘ Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market. ADVERTISEMENT coonwA Cong cu theo ddic 7 tien subecs Consider the fallow Accounting return on two stocl the market. Assume that both scenarios are equally likely to happen (i.c., probability of scenario 1 = probability of scenario 2=0.5). ‘Anatomy and Physiology Scenarios Market Return Aggressive Stock Defensive Stock Biology 1 3% 2% 6% chemistry 2 25% 38% 19% Gil Engineering a. What are the betas of the two stocks? Computer Science b. Plot the two securities on the SMI. graph. Assume that T-bill rate is 6%, conomi © What are the alphas of each? Solutions Expert Solution a) a) beta = change in sceurity return / change in market return Aggressive stock: Beta = (38% - (-2%) / (2 Defensive stock: Beta 12% - 6%) / (25% -5%) = 0.3, b) Expected return on market = (0.545%) + (0.5*25%) = 15% siven ris fre rate = 6% As per CAPM requird return = Rf+ beta*(m - RO Rf = risk free rate Rm = market return 'SML return of aggressive stock = 6% + 2¥(15% - 694) = 24% SML return of Defensive stock = 6% + 0.3*(25% - 6%) % Graph: Math Mechanical Engineering Operations Management Coty prog Re sui FASHIONAL CTA ae Biru tid ) Expecetd return on aggressive stock = (0.5*(-2%)) + (0.5*38%) = 18% Expected return on defesive stock = (0.5*6%) + (0.5*12%) = 9% Alpha = expected return - SML return ‘Alpha Agere: Alpha Defensive = 9% -8.7% = 0.3% = 18% - 24% = -6% me een On aad een tT AY Join Now ; wi «

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