Corporate Finance Expected Return

A

The expected one year return on the investment
is 20%. The probability distribution of possible return is approximately normal with a standard deviation of 15 percent.
a. What are the chances that the investment will result in a negative return?

b. What is the probability that the return will be greater than 10%? 20 %? 30%? 40%? 50%?

B

Presently the risk free rate is 10% and the expected return on the market portfolio is 15%. Market analysts’ return expectations for four stocks are listed here, together with each stock’s expected beta: ·

ISTOCK EXPECTED RETURN EXPECTED BETA
S.Z Corporation 17% 1.3
UP Company … 14.50% 0.8
NA Company 15.50% 1.1
PE Inc. 18% 1.7

a. If the analysts’ expectations are correct·, which stocks (if any) are overvalued? Which (ir any} are undervalued?\•

b . If the risk free rate were suddenly to rise to 12% and the expected return on the market portfolio to 16 percent, which stock if any would be over-valued? Which if any under-valued? Assume that the market analysts· return and. beta expectations for our four stocks stay the same.