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FIN 571 Wk 5 - Apply: Wk 5 Quiz

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FIN 571 Wk 5 - Apply: Wk 5 Quiz

Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $42. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.7%.

 

Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as follows.

 

PortfolioAverage Annual

Rate of Return (%)Average Premium (Extra return

versus Treasury bills) (%)

Treasury bills       3.8                     

Treasury bonds            5.3              1.5  

Common stocks           11.5            7.7  

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Assume these are the stock market and Treasury bill returns for a 5-year period:

 

Year      Stock Market Return (%)      T-Bill Return (%)

2013                  32.10                 0.05

2014                  11.30                 0.05

2015                  −2.00                 0.05

2016                  13.40                 0.23

2017                  21.70                 0.25

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Required:

 

 

 

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