Discussion board: Risk, Return, and the Capital Asset Pricing ModelAs a first day intern at Tri-Star Management...

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Finance

Discussion board:
Risk, Return, and the Capital Asset Pricing ModelAs a first dayintern at Tri-Star Management Incorporated the CEO asks you toanalyze the following in-formation pertaining to two common stockinvestments, Tech.com Incorporated and Samâ€™s Grocery Cor-poration.You are told that a one-year Treasury Bill will have a rate ofreturn of 5% over the next year. Also, information from aninvestment advising service lists the current beta for Tech.com as1.68 and for Samâ€™s Grocery as 0.52. You are provided a series ofquestions to guide your analysis.
Estimated Rate of Return
EconomyÂ Â Â Â Â Â Â Â Â Â Â Â ProbabilityÂ Â Â Â Â Â Â Â Â Tech.comÂ Â Â Â Â Â Â Â Â Â Â Samâ€™s GroceryÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â S&P 500
RecessionÂ Â Â Â Â Â Â Â Â Â 30%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â â€“20%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â â€“ 4%
AverageÂ Â Â Â Â Â Â Â Â Â Â Â Â 20%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 15%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 11%
ExpansionÂ Â Â Â Â Â Â Â Â Â 35%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 30%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 8%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 17%Â Â Â Â Â Â Â
BoomÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 15%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 10%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 27%
1. Which of these two-stock portfolios do you prefer?Why

Answer & Explanation Solved by verified expert

4.4 Ratings (801 Votes)

Expected return from Tech.com =[-20*.3]+[15*.2]+[30*.35]+[50*.15]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 15%

Expected return from sam grocery : [5*.3]+[6*.2]+[8*.35]+[10*.15]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 7%

Expected return from s&p (market) =[-4*.3]+[11*.20]+[17*.35]+[27*.15]=11%

Required return from tech.com :Rf+[Beta(Rm-Rf)]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 5+ [1.68(11*5)]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 5+ [1.68*6]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 5+ 10.08

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 15.08%

Required return from sam 5 +[.52(11-5)].

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 5+ [.52 *6]

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 5+ 3.12

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 8.12%

since Both stock are yielding more than there expected return ,both are acceptable.However we will prefer most \"Sam grocery\"as it is yielding more by 1.12% than expected [8.12-7] as against Tech.com by .08% [15.08-15]

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Discussion board: Risk, Return, and the Capital Asset Pricing ModelAs a first day intern at Tri-Star Management...

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