Chicago Gear - (Beta and required return The riskless return is currently 6 and Chicago Gear has estimated the contingent returns given here a

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Unformatted text preview: (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here. a. Calculate the expected returns on the stock market and on Chicago Gear stock. Expected Returns on the market = ∑Probability * Realized return of market Expected Returns on the market = - 0.20*10 + 0.35*10 + 0.30*15 + 0.15*25 Expected Returns on the market = -2+3.5+4.5+3.75 = 9.75% Expected Returns on the Chicago Gear Stock = ∑Probability * Realized return of stock Expected Returns on the Chicago Gear Stock = -0.20*15 + 0.35*15 + 0.30*25 + 0.15*35 Expected Returns on the Chicago Gear Stock = -3.0 + 5.25 + 7.5 + 5.25 = 15.00% b. What is Chicago Gear’s beta? cg = cov β cg, m / σ 2 m = 180/121 = 1.49 You can apply the formula ∑Probability * (Expected Returns on the market - Realized return of market)*( Expected Returns on the Chicago Gear Stock- Realized return of...
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This note was uploaded on 03/23/2012 for the course ACCT 306 taught by Professor Mikewoodard during the Spring '12 term at DeVry Houston.

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