What is the excess return required for this stock

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Reference no: EM131491735

You hold a fully diversified portfolio of stocks and are considering investing in the XYZ Company. The firm's prospects look good and you estimate the following probability distribution of possible returns:

Probability ----------------------- Return

70% -------------------------------- 15%

20% -------------------------------- 9%

10% -------------------------------- 20%

The return on the market is 13.5% and the risk free rate is 7%. You have calculated XYZ's beta from past returns as 1.3 and you believe this will be the future beta.

1. What is the expected return for XYZ?

A) 14.30%

B) 14.67%

C) 33.33%

D) 13.50%

2. What is the required return for XYZ according to the CAPM?

A) 8.45%

B) 13.50%

C) 15.45%

D) 24.55%

3. If the standard deviation of XYZ's distribution of possible returns is 3.03%, what is the coefficient of variation?

A) 3.03%

B) 4.72%

C) 14.3%

D) 21.2%

4. What is the excess return required for this stock?

A) 6.5%

B) 7%

C) 8.45%

D) 1.95%

5. Based on the information and calculations in the three questions above, should you buy stock in XYZ Company?

A) Yes

B) No

Reference no: EM131491735

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