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##### stock rates and growth

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solution

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I need some help with a Finance assignment concerning portfolio beta, required rate of return, expected rate of return, and P/E ratio. The attached spreadsheet contains the calculations I've completed as well as questions I am having trouble with. The textbook for the course does not cover everything requested in this assignment, unfortunately.;Attachment Preview;Beta and Return.xlsx Download Attachment;Beta;Stock A;Stock B;Stock C;Stock D;Stock #;Total;Stock Price;$72.00;$41.15;$70.80;$86.91;$87.37;$358.23;Weight (% Each Stock's;of Total);Beta;20.0988%;1.25;11.4870%;1.33;19.7638%;1.34;24.2609%;1.28;24.3894%;1.16;100.0000%;CAPM for Required Rate of Return;Weighted;Portfolio;Beta;0.25;0.15;0.26;0.31;0.28;1.26;Risk Free;Rate of;Return;* Market;Risk;+ Beta Premium;= Req'd;Rate of;Return;Instructions;1. Weight the portfolio. I weighted it on each current stock price (column C) as a percentage of aggregate stock;price (column D). (a) Should I use an average stock price over a certain period instead? (b) Is my weighting;method correct?;2. Calculate the portfolio's beta. I list each stock's current beta per Yahoo Finance (column E) and multiply each;stock's beta by that stock's weight from column D. The weighted beta (cell F8) is 1.25. Did I do this correctly?;3. Use the Capital Asset Pricing Model to estimate the required rate of return. I am lost on this.;3(a) What is the best choice for risk-free rate of return? The current yield on the 3-month Treasury bill is 0.01;which seems too low to be useful. The current yield on the 10-year Treasury bond is 2.24, which seems like a;better choice.;3(b) For beta, should I use each stock's actual beta (column E), each stock's weighted beta (column F), or the;1.26 beta I calculated for the entire portfolio? All 5 companies are software firms.;3(c) Our textbook always provides the market risk premium. In this real-world scenario, how do I estimate the;market risk premium?;4. Calculate expected rate of return.;4(a) The textbook has spoiled me by always giving a percentage decrease or increase for depression, recession;normal market, and boom market. How does one estimate these percentages in real life? For instance, all 5 of my;companies are software firms. Would I base the recession, normal, and boom rates of return on historical data?;(And if so, what period of time would you recommend? 2008 would probably be good for the recession;percentage.;4(b) Starting in cell B25 is a table based on hypothetical expected rates of return.;Variance and Standard Deviation using hypothetical rates of return for 4 states of economy;Deviation;Avg;Expected;from;Squared;Squared;State of;Rate of Expected;Value of Deviation;Standard;Economy;Return;Return;Deviation;(=^2);Deviation;Depression;-0.600;-0.475;0.225625;Recession;-0.400;-0.275;0.075625;Normal;0.100;0.225;0.050625;Boom;0.400;0.525;0.275625 0.156875 0.39607449;-0.125;5. The last part of the assignment is to calculate the current P/E ratio for each of the 5 stocks. These are based;on diluted EPS numbers retrieved from Yahoo Finance. Is there some adjustment I should have made on the first;stock [148.93617 P/E ratio] and the fifth stock [-68.51145]?;Price-to Earnings;Stock Price Diluted EPS P/E Ratio;$70.00;0.47 148.93617;$39.15;2.39 16.3807531;$41.97;3.45 12.1652174;$76.41;2.06 37.092233;$89.75;-1.31 -68.51145;View Full Attachment

Paper#17932 | Written in 18-Jul-2015

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