Question 1 The estimated earnings yield and dividend yield of the stock market are 4% and 1.5%, respectively, the yield on 10-year Treasury bonds is 3%, and the yield on Moodys' A rated bond yield is 4.5%, the consensus long-term SP500 earnings growth rate forecast is 15%. The market confidence adjustment factor is 0.10. Given these expectations, would you shift your money from the stock market into the less risky T-bonds? This model is called what? YES, shift money from the stock market into T-bonds; Fed Model NO, stay with the stock market; Yardeni Model Need more information on T-bill return and optimal interest rate; Tylor Model NO, stay with the stock market; FCFF model.
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- Consider the following scenario analysis: Rate of Return Stocks Scenario Bonds Probability 0.20 Recession -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No Ⓒ Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Standard Deviation Return Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? StockQuestion 2 Suppose the yield on short -term government securities (perceived to be risk-free) is about 4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the CAPM a. What is the expected return on the market portfolio b. What would be the expected return on a zero-beta stock? c. Suppose you consider buying a share of stock at K40. The stock is expected to pay a dividend of K3 next year and to sell then for K41. The stock risk has been evaluated at Beta - -0.5. Is the stock overpriced or Under-priced? (show your workings) d. If the expected rates of return on Portfolio A and B are 11% and 14% respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is at 6%, while the expected return of the S&P500 index is 12%. The standard deviation of Portfolio A is 10% annually while that of B is 3196 and that of the Index is 20%. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your…Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 −4 % 16 % Normal economy 0.50 18 % 9 % Boom 0.30 29 % 6 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Yes or No b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard deviation Stock Bond c. Which investment would you prefer?
- Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 -4% 19% Normal economy 0.40 20% 9% Boom 0.40 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No O Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % c. Which investment would you prefer? Stock Bond Which investment would you prefer?Consider the following scenario analysis: RATE OF RETURN Stocks &Bonds Scenario Probability Stocks Bonds Recession 0.20 −9% 21% Normal economy 0.70 22 9% Boom 0.10 25 5% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Yes or No b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % %Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −5 % 18 % Normal economy 0.60 19 % 7 % Boom 0.10 24 % 7 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? multiple choice No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) c. Which investment would you prefer?
- Consider the following scenario analysis: Scenario Probability Rate of Return Stocks Bonds Recession 0.20 -6% 17% Normal economy 0.60 19% 9% Boom 0.20 30% 5% Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.2 -4 % 15 % Normal economy 0.7 16 11 Boom 0.1 25 3 Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds. a. What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.) b. What are the expected rate of return and standard deviation of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only? Explain the benefit of diversification.Problem 2 . Suppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price Boom 0.35 Normal growth 0.30 Recession 0.35 $140 110 80 HPR (including dividends) 44.5% 14.0 -16.5 Use Equations 5.11 and 5.12 to compute the mean and standard deviation of the HPR on stocks.
- QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.3 -4% 12% Normal economy 0.4 13 7 Boom 0.3 22 3 a. What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.) Recession: % Normal economy: % Boom: % b. What are the expected rate of return and standard deviation of the portfolio?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected Return: % Standard Deviation: %Suppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price HPR (includingdividends) Boom 0.30 $ 140 53.5 % Normal growth 0.28 110 17.5 Recession 0.42 80 −12.0 Use the equations E(r)=Σsp(s)r(s)E(r)=Σsp(s)r(s) and σ2=Σsp(s) [r(s)−E(r)]2σ2=Σsp(s) [r(s)−E(r)]2 to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)