Risk and Return?

Assignment 15 Using the CAPM Group Number Class meeting Morning / Afternoon 1) Assume Merck (MRK) just finished paying an annual dividend of $1.80. You look up their beta and it equals 0.39, implying it's much less risky than the market porttolio. The current risk- free rate equals 2.35%. Assume a market risk premium of 5%, Merck's current stock price is 558.81. Assuming investors expect Merck to grow at a constant rate in perpetuity, what is that growth rate expectation? [hint: it's the one that causes the PV of expected future cash flows to equal $58.81] 2) Now assume that you expect Merck to grow its dividends at 3% in perpetuity. If you are really quite certain that you got it right (and the stock market got it wrong), what should you do? In other words, do you perceive Merck's current stock price to indicate that the market has over- or under-valued the company? 3) Suppose the market risk premium. is 5% and also that the standard deviation of returns on the market portfolio is 0.19. Further assume that the correlation between the returns on ABX (Barric returns on ABX stock is 0.26. Finally assume that the risk-free rate is 4%. Under the CAPM, what is the expected return on ABX stock? k Gold) stock and returns on the market portfolio is-0.10, while the standard deviation of