Questions
6-3 – Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5, Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?
7-2 – Two investors are evaluating General Electric’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years and the other normally holds stocks for 10 years. On the basis of the type of analysis done in this chapter, they should both be willing to pay the same price for General Electric’s stock. True or false? Explain.
Problems
6-2 – (Required rare of return) – Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?
6-6 – (Required rare of return) – Suppose rRF = 5%, rM = 10%, and rA = 12%. A. Calculate Stock A’s beta. B. If Stock A’s beta were 2.0, then what would A’s new required rate of return?
7-1 – (DPS Calculation) – Thress Industries just paid a dividend of $1.50 a share (i.e., D0 = $1.50). The dividend is expected to grow 5% a year for the next 3 years and then 10% a year there-after. What is the expected dividend per share for each of the next 5 years?
7-8 – (Preferred stock rare of return) – What is the nominal rate of return on a preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140?
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