# Question

Consider the following information about two stocks (D and E) and two common risk factors (1 and 2):

a. Assuming that the risk-free rate is 5.0%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks.

b. You expect that in one year the prices for Stocks D and E will be $55 and $36, respectively. Also, neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levels listed at the beginning of the problem?

c. Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly increases by 0.25% (i.e., from x% to (x + 0.25) %, where x is the value established in Part a. What are the new expected returns for Stocks D and E?

d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your opinion about what the stock prices will be in one year, what adjustment will be necessary in the current (i.e., today's)prices?

a. Assuming that the risk-free rate is 5.0%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks.

b. You expect that in one year the prices for Stocks D and E will be $55 and $36, respectively. Also, neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levels listed at the beginning of the problem?

c. Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly increases by 0.25% (i.e., from x% to (x + 0.25) %, where x is the value established in Part a. What are the new expected returns for Stocks D and E?

d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your opinion about what the stock prices will be in one year, what adjustment will be necessary in the current (i.e., today's)prices?

## Answer to relevant Questions

Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship:E(RA) = (1:1)λ1 + (0:8)λ2E(RB) = (0:7)λ1 + (0:6)λ2E(RC) = (0:3)λ1 + (0:4)λ2a. If λ1 = 4% and λ2 = 2%, what ...Besides comparing a company's performance to its total industry, discuss what other comparisons should be considered within the industry.Discuss the general factors that determine the rate of growth of any economic unit.Given the following balance sheet, fill in the ratio values for 2013 and discuss how these results compare with both the industry average and prior average performance of Sophie Enterprises.SOPHIE ENTERPRISES CONSOLIDATED ...Would you expect the risk premium for an investment in an Indonesian stock to be the same as that for a stock from the United Kingdom? Discuss your specific reasoning.Post your question

0