Risk - reward ratio - using the sml, Risk Management

Assignment Help:

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


Related Discussions:- Risk - reward ratio - using the sml

Describe the risks to bpo company, Question 1: You are the actuary to a...

Question 1: You are the actuary to a pension scheme. Describe which asset types you would recommend, with reasons, for the following membership profile: a) A newly set pens

Explain the use of hani-raafat risk calculator, Question 1: (i) Descri...

Question 1: (i) Describe five steps to risk assessment for work-related driving activities. (ii) List ten important points which employers should consider to ensure that wo

Organisational and communication strategy, An organisational and communicat...

An organisational and communication strategy identifying the procurement and looking at the responsibilities, work breakdown, organisational breakdown AND the management of the cul

Components of risk management system, (a) Risk has always been an intrinsi...

(a) Risk has always been an intrinsic part of project management. With increasing market competition, technology, and globalisation, risk management is continuously gaining wider

Internal control systems need to be continuously monitored, QUESTION (a...

QUESTION (a) Internal control systems need to be continuously monitored. This is a process that assesses the quality of the performance of a system over time and is accomplishe

Determine the optimum prices and outputs, The basic question in this case i...

The basic question in this case is whether Jetliners and Acme Airline should work together to develop a new super sized airframe or should each company seek to develop its own vers

Determine about the liquidity risk, Determine about the Liquidity Risk ...

Determine about the Liquidity Risk Liquidity risk is the risk associated with specific secondary market in which a security trades. An investment which can be bought or sold

Risk management should follow a structured approach, Risk management  shou...

Risk management  should follow a structured approach The elements of a structured approach  to  risk management,  as you have  already studied above, are risk evaluation, risk

Define the regulation risk - non-systematic risk, Define the Regulation Ris...

Define the Regulation Risk - Non-Systematic Risk Some  investments  can  be  comparatively attractive  to  other investments  due to certain  regulations  or  tax  laws  which

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd