ps6 - CAPM holds What is the beta of TriStars stock 3 How...

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FIN300 Introduction to Managerial Finance Professor H. Wang Problem Set #6 Due: Friday, April 9, 2010 Please make sure to write clearly the name AND ID # of each member in the group. Please turn in your solutions at the beginning of the lecture on the due date. Late submissions or submissions by groups larger than four students will not be accepted. 1. Holup, Inc., makes pneumatic equipment. The beta of Holup’s stock is 1.2. The expected market risk premium is 8.5 percent, and the current risk-free rate is 6 percent. Assume the capital asset pricing model (CAPM) holds. What is the expected return on Holup’s stock? 2. Suppose the expected market risk premium is 7.5 percent and the risk-free rate is 3.7 percent. The expected return on TriStar’s stock is 14.2 percent. Assume the
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Unformatted text preview: CAPM holds. What is the beta of TriStars stock? 3. How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large, well-diversified portfolios? 4. Suppose the beta for the Ross Corporation is 0.80. the risk-free rate is 6 percent, and the market risk premium is 8.5 percent. What is the expected return for the Ross Corporation? 5. A stock has a beta of 1.8. A security analyst who specializes in studying this stock expects its return to be 18 percent. Suppose the risk-free rate is 5 percent and the market-risk premium is 8 percent. Is the analyst pessimistic or optimistic about this stock relative to the market's expectations?...
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