Problem 30

Intro

You've collected the following information for two stocks:

	Stock 1	Stock 2
Beta	0.8	1.5
Dividend yield	7%	1%
Growth rate	4%	8%

The risk-free rate is 2% and the expected return on the market portfolio is 8%.

Part 1

Without doing any calculations, which stock should you buy?

Stock 1, because it has a lower beta

Both stocks

Stock 2, because it has a higher beta

Stock 1, because it has a higher dividend yield

Stock 2, because it has a higher growth rate

Neither stock

Not enough information provided

Saved

Attempt 1/3 for 10 pts.

Part 2

What is the required return for stock 1 based on the CAPM?

Part 3

What is the required return for stock 2 based on the CAPM?

Part 4

Which stock should you buy?

Stock 2, because its required return is greater than stock 1's

Not enough information provided

Neither stock

Stock 1, because its required return is greater than stock 2's

Both stocks

Part 5

What is the expected return for stock 1 based on the constant growth model?

Part 6

What is the expected return for stock 2 based on the constant growth model?

Part 7

Which stock should you buy?

Stock 2, because its expected return is greater than stock 1's

Stock 1, because its expected return is is greater than stock 2's

Not enough information provided

Both stocks

Neither stock

Stock 2, because its expected return is greater than its required return

Stock 1, because its expected return is greater than its required return