Expected Returns The market and Stock S have the following probability distributions Probability Km Ks .3 15% 20% .4 9% 5% .3 18% 12% Calculate.

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Presentation transcript:

Expected Returns The market and Stock S have the following probability distributions Probability Km Ks .3 15% 20% .4 9% 5% .3 18% 12% Calculate the expected rate of return for the market and the stock Calculate the standard deviation for the market and the stock. Calculate the coefficients of variation for the market and the stock.

Security Market Line The McAlhany Investment Fund has total capital of $500 million invested in five stocks. The Current risk free rate is 8%. Stock Investment Stocks Beta Coefficient A 160 Mill .5 B 120 Mill 2.0 C 80 Mill 4.0 D 80 Mill 1.0 E 60 Mill 3.0 Where the market returns have the following estimated probability distribution for the next Period: Probability Market Return .1 10% .2 12% .4 13% .2 16% .1 17% Compute the expected rate of return for the market Compute the beta coefficient for the investment fund (remember this is a portfolio) What is the estimated equation for the security market line? Compute the fund’s required rate of return for the next period.

Required Rate of Return Suppose Krf = 8%, Km = 11%, Kb = 14% Calculate Stock B’s beta If Stock B’s Beta were 1.5, what would be B’s new required rate of return?

Portfolio Required Rate of Retun Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $400,000 1.5 B $600,000 (.50) C $1,000,000 1.25 D $2,000,000 .75 If the market required rate of return is 14 percent and the risk-free rate is six percent, what is the fund’s required rate of return?

Required Rate of Return Stock R has a beta of 1.5, Stock S has a beta of .75. the expected rate of return on the market is 15% and the risk free rate if return is nine%. By how much does the required return on the riskier stock exceed the required return on the less risky stock?