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“Discussion Question”

A year ago, you have purchased some stock with beta of 0.6. You have not noticed how well your stock has done during the year, but you do know that the T-bills rate has remained 10% throughout the year. As you are reading the financial journal, you have noticed that the market risk premium for average stocks is 5 % during the year. Given only this information:

a) What do you require the return on your stock?
b) Comment whether you will still hold the stock, if the market return is 15%?

Please Discuss Here about this GDB of MGT201.Thanks

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Replies to This Discussion

tariq bahi sallam
actually muj samjh nahi arhi hai db kess trha krni hai
meri last gdb beh zero mark thi pta nahi ku
plaz tariq bahi do help me and upload solutiona s soon as possible ,just for idea
Dear Fellows
here is the complete formula for GDB. Only put the values and get answers.
SML Linear Equation for the Required Return of any Stock
:
r
A = rRF + (rM - rRF ) β A .
In the above equation
r
A = Return that Investors Require from Investment in Stock A.
r
RF = Risk Free Rate of Return (ie. T-Bill ROR).
r
M = Return that Investors Require from Investment in an Average Stock (or the Market Portfolio of All
Stocks where
β M = + 1.0 always). β A = Beta for Stock A. (rM - rRF )
β
A = Risk Premium or Additional Return in Excess of Risk Free ROR to compensate the Investor for
the additional Risk
Madam Sara Mayo aap thora sa agar book ko parh liya karo aur video lec sun liya karo tu zero marks nahi aye gai.. Cheating ke liye bhi aqal ki zarorat hoti hai.........Agar app ke pass hai tu use it......
Tomorrow I'll try my level best that i upload the right solution..
i thin mr farhan mein ne app se nahi tariq bahi se help ka kha tha
or wese beh merey pass hu na hu what is ur problem. do ur own business.
O hooooooo itna ghusa, itna ghusa................. ha ha ha ha ha..........
Madam tumhe bs itna kehna chah raha tha k kuch khud bhi parh liya karo.............
1st Answer:

First of all if the market gave a return of 15% then your stocks with beta of 0.6 would have given return of 9%. When the market is in a downturn invest low beta stock (i.e. beta less than 1) but if the market is making high giving good returns then you should invest in high beta stocks (i.e. beta more than one) so that you get more return than the market. Metals, Real estate, Power etc are high beta sectors and Pharma, FMCG etc are low beta stocks. Your query about how to calculate the return on any stock, then I would say that picking of a good stock needs at least 20 parameters to calculate, mainly PE ratio, EPS, Net profit margin, profit growth, sector outlook, macro economy, debt/equity ratio etc. Since now the market is posing for great return in the coming quarter after yen deregulation and rebounding US economy you should better switch from a low beta stock to a portfolio of high beta stocks


2nd Answer

a) 9%. Beta * (Risk Free + Equity Risk Premium) = 0.6 * (10 + 5) = 0.6 * 15 = 9.

b) No. You would not accept a risky 9% return when T-bills return 10% risk free.
a)
rA = rRF + (rM - rRF) βA
rA = 10% + (5% - 10%) 0.6
rA = 0.1 + (0.05 – 0.1) 0.6
rA = 7.0%

b)
rA = rRF + (rM - rRF) βA
= 10% + (20% - 10%) (2.0)
= 30%
Interpretation of Result:
Investors require a 30% pa Return from Investment in Stock A. This is higher than the Market ROR because the Stock (Beta=2.0) is Riskier than the Market (Beta=1.0 always).
If required return (30%) is higher than Expected Return (20%) it means that Stock A is Unlikely to Achieve the Investor’s Requirement and investors will not invest in Stock A.
Please is ka solution kia ho ga
hahahahahhhhhahhah farhan yar kya joke mara sahe kaha waysay
Thanx.. But Sara Mayo ne lagta hai ke mind kar liya hai
is this formulas are 100% sure.......??????

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