mfrossard
Mar 8, 2012, 08:38 PM
So Ive done the entire question, but Im wondering if I should have more for part b on my explanation? Also- would you agree that my values in part A are correct?
a.Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent.
r_a=r_f+β_a (r_m-r_a)
ra=.06+1.2(.16-.06)
ra=.06+1.2(.10)
ra=.06+.12
ra=.18 or 18%
b.Why is the rate you computed a fair rate?
This would definitely be considered a fair rate because the expected rate of return is only 16% and the calculated rate of return is 18%, which exceeds all expectations.
a.Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent.
r_a=r_f+β_a (r_m-r_a)
ra=.06+1.2(.16-.06)
ra=.06+1.2(.10)
ra=.06+.12
ra=.18 or 18%
b.Why is the rate you computed a fair rate?
This would definitely be considered a fair rate because the expected rate of return is only 16% and the calculated rate of return is 18%, which exceeds all expectations.