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
what are the characteristics of hedgeable risks

Step 1: Stock Data: Choose four stocks, 2from the Dow Jones Industrial Average (DJIA 30) and 2other stocks of your choice.Download, import, or copy and paste the monthly price info

Determine a process to managing risk 1.  Risk committee set up to address risk issues identified for example regular risk audits, to identify and estimate likelihood and conseq

#qusuppose that a bank sole business is to lend in two region of the world. The lending in each region Has the same characteristic as in example 21.5 of section 21.8. Lending to

Q. What is Material Safety Data Sheet ? 1. Material Safety Data Sheet is a formal document containing important information about the characteristics and actual or potential ha

Risk free assets is one for which there is no uncertainty in its expected rate of return and hence the standard deviation of such return is zero. Generally the expected rate of ris


The task for Report & Appendices The main aim of the appendices is to show a series of graphical and descriptive material which demonstrate your technical knowledge of the proc

Question 1: (a) Employers should conduct proper health risk assessment in order to identify and control health risks before they lead to losses. Describe the four stages invo

what are the listing procedures for a company in international stock exchange