Question

6. Consider two stocks: The beta of stock A is 3 times larger than that of stock B, and the expected return on stock A is 6% higher than that on stock B. The market risk premium is 6% and the market portfolio's volatility is 20%. Assume both stocks are fairly priced according to the CAPM. a. What is the beta of stock B? (Hint: Apply the SML to both stocks) b. The risk-free rate is 5%. What is the expected return on stock B? c. Investors expect firm B to pay a dividend of $10 per share at the end of each year in perpetuity. What is the price of a share of stock B? (Recall: the price of a stock paying a constant dividend Div in perpetuity is P = Div / E(R)) d. Firm B has 50,000 shares outstanding and its market value constitutes 8% of the market portfolio. Firm A has 10,000 shares outstanding and constitutes 2% of the market portfolio. What is the share price of stock A? (Recall: What determines a firm's weight in the market?)

          6. Consider two stocks: The beta of stock A is 3 times larger than that of stock B, and the expected
return on stock A is 6% higher than that on stock B. The market risk premium is 6% and the market
portfolio's volatility is 20%. Assume both stocks are fairly priced according to the CAPM.
a. What is the beta of stock B? (Hint: Apply the SML to both stocks)
b. The risk-free rate is 5%. What is the expected return on stock B?
c. Investors expect firm B to pay a dividend of $10 per share at the end of each year in perpetuity.
What is the price of a share of stock B? (Recall: the price of a stock paying a constant dividend
Div in perpetuity is P = Div / E(R))
d. Firm B has 50,000 shares outstanding and its market value constitutes 8% of the market
portfolio. Firm A has 10,000 shares outstanding and constitutes 2% of the market portfolio.
What is the share price of stock A? (Recall: What determines a firm's weight in the market?)

6. Consider two stocks: The beta of stock A is 3 times larger than that of stock B, and the expected
return on stock A is 6% higher than that on stock B. The market risk premium is 6% and the market
portfolio's volatility is 20%. Assume both stocks are fairly priced according to the CAPM.
a. What is the beta of stock B? (Hint: Apply the SML to both stocks)
b. The risk-free rate is 5%. What is the expected return on stock B?
c. Investors expect firm B to pay a dividend of 10 per share at the end of each year in perpetuity.
What is the price of a share of stock B? (Recall: the price of a stock paying a constant dividend
Div in perpetuity is P = Div / E(R))
d. Firm B has 50,000 shares outstanding and its market value constitutes 8% of the market
portfolio. Firm A has 10,000 shares outstanding and constitutes 2% of the market portfolio.
What is the share price of stock A? (Recall: What determines a firm's weight in the market?)

Added by George E.

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