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5 May 2018

a. (Required Rate of Return Using CAPM) Compute a fair rate ofreturn for Apple
common stock, which has a 1.5 beta. The risk-free rate is 8 percentand the
market portfolio (New York Stock Exchange stocks) has an expectedreturn of
16 percent.
b. Why is the rate you computed a fair rate?

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Jamar Ferry
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8 May 2018

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Stock Y has a beta of 1.55 and an expected return of 15.1percent. Stock Z has a beta of 0.9 and an expected return of 11.2percent. Required: If the risk-free rate is 4.65 percent and themarket risk premium is 7.15 percent, are these stocks correctlypriced? Are these two stocks undervalued or overvalued?

Jersey Jewel Mining has a beta coefficient of 1.2. Currentlytherisk-free rate is 5 percent
and the anticipated return on the market is 11 percent. JJM paysa$4.50 dividend that is
growing at 6 percent annually.
a. What is the required return for JJM?
b. Given the required return, what is the value of the stock?
c. If the stock is selling for $80, what should you do?
d. If the beta coefficient declines to 1.0, what is the new valueofthe stock?
e. If the price remains $80, what course of action should youtakegiven the valuation in
(d)?

The tendency of a stock's price to move up and down with themarket is reflected in its beta coefficient. Therefore, beta is ameasure of an investment's market risk, and is a key element of theCAPM. In this part of the project, you get financial informationusing Yahoo!Finance (found at http://finance.yahoo.com/ ) To find acompany's beta, enter the desired stock symbol and request a basicquote. Once you have the basic quote, select the "Key Statistics".Scroll down this page to find the stock's beta. In your initialresponse to the topic you have to answer all 5 questions. You areexpected to make your own contribution in a main topic as well asrespond with value added comments to at least two of yourclassmates as well as to your instructor. From Yahoo!Finance obtaina report on any two companies.

1.What are the betas listed for these companies?

2.If you made an equal dollar investment in each stocks whatwould be the beta of your portfolio?

3.If you made 70% of dollar investment in stock A, and 30% ofdollar investment in stock B, what would be the beta of yourportfolio? Please show your work.

4.Apply the Capital Asset Pricing Model (CAPM) Security MarketLine to estimate the required return on these two stocks.Assumptions and Data: Note that you will need the risk-free rateand the market risk premium. Assume a 5% market risk premium. Toget the current yield on 10-year Treasury securities go toFinance!Yahoo’s (www.finance.yahoo.com) -click on Market Data -Bonds. You will use the current yield on 10-year Treasurysecurities as the risk-free rate to estimate the required rate ofreturn on stocks.

5.Compare the required return on these stocks calculated usingCAPM in question #4 against their historical return over the last52 weeks, found in the Yahoo!Finance - Key Statistics. Is there adifference between these returns? Is this a problem? Why is there adifference?

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