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Based on current dividend yields and expected growth rates of return on stocks A and B are 11% and 14%, respectively. The beta of stock A is .8,...

1.      Based on current dividend yields and expected growth rates of return on stocks A and B are 11% and 14%, respectively. The beta of stock A is .8, while that of stock B is 1.5. The T-bill rate is currently 6%, while the expected rate of return on the S&P 500 index is 12%. The standard deviation of stock A is 10% annually, while that of stock B IS 11%.

a)    If you currently hold a well-diversified portfolio, would you choose to add either of these stocks to your holding?

b)    If instead you could invest only in bills and one of these stocks, which stock would you choose? Explain your answer using either a graph or a quantitative measure of the attractiveness of the stocks. 

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COMM367 - Chapter 8, 12, and 22 (Answers - Homework Assignment #4) (1).doc

1 Answer: Stock A: αA = rA- [rf + βA x (rM – rf)] = .11 – [.06 + 0.80 x (.12 - .06)] = .11 - .108 = 0.002 = .20%
αA = Stock’s expected return if market’s excess return is zero ; rf =...

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