Risk - reward ratio - using the sml, Risk Management

You observe the following statistics in the market. The stock of YUM! Brands Inc. (the holding company of KFC, Taco Bell and Pizza Hut among others) costs $66.24 today. Analysts estimate that it will cost $71.06 one year from today and will pay a dividend of $1.14. The estimated beta for YUM! is 0.83. Microsoft (MSFT) stock sells for $31.74. Analysts estimate that it will cost $32.46 in exactly one year and that the annual dividend paid during the year will be $0.80. The estimated beta for MSFT is 0.97. Calculate the expected return for each stock. Assume that these securities are correctly priced and that analyst estimates are correct. Based on the CAPM, what is the expected return on the market portfolio? What is the risk-free rate? These are real data (source YahooFinance). Do the answers you derive here match your knowledge of current T-Bill rates in the market? Do you still trust the analysts? Hint: If the CAPM is correct, then the security market line implies that all assets have the same risk premium, so you may solve for the risk-free rate by setting the reward to risk ratios of YUM! equal to those of MSFT.

The reward to risk ratio = (the expected return on the asset - Risk Free rate)/Beta_asset

Posted Date: 2/28/2013 3:15:59 AM | Location : United States

Related Discussions:- Risk - reward ratio - using the sml, Assignment Help, Ask Question on Risk - reward ratio - using the sml, Get Answer, Expert's Help, Risk - reward ratio - using the sml Discussions

Write discussion on Risk - reward ratio - using the sml
Your posts are moderated
Related Questions
Question: You have been appointed as the treasurer of Manchester International, an electronic firm with many subsidiaries abroad. The management of Manchester International is

Here is a basic risky decision problem: Using the template below, sketch the results of a sensitivity analysis on P(Deal Succeeds) for a risk-neutral decision maker. How hi

RISK ANALYSIS: THE NEW  PARADIGM  IN FOOD SAFETY  ASSURANCE   In  the  early  part  of  the  20th  Century, safety  concerns  led  to  the development of performance  criteria

Stakeholder Analysis In the case of syringe management plan, the stakeholders include Maribyrnong Council, Yarra Council and other neighboring ones, manufacturers, distributors

Q. Show Quick and regular returns of the investments? Quick and regular returns of the investments: every investor wants a quick and regular returns on his investment sufficienc

Question: (i). Describe the term ‘ecosystem' (ii). What are the major ecosystems in the tropical marine environment. (iii). State and describe four main ecological/eco

Question 1: Explain role of the project manager throughout a project life cycle with reference to the following. (a) Setting up a project team (and the factors he has to con

The Investment Committee is big on active management, and believes that there are areas/pockets of inefficiencies in the market. Knowing that you have taken Finance 455 at X-Univer