I picked Ford Motor Company (F) and WalMart Stores (WMT) 1. What are the betas l
ID: 2627070 • Letter: I
Question
I picked Ford Motor Company (F) and WalMart Stores (WMT)
1. What are the betas listed for these companies? Ford Motor Company (F) with a beta of 1.34 and WalMart Stores (WMT) with a 0.37 found on Wednesday, June 18, 2014 @10:46 p.m.
2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio? The weighted average of my beta portfolio would be: 0.5*1.34 + 0.5*0.37 = 0.855 3.
3. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahooâs (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.
The expected return rate for Ford Motor (F) is 2.58+1.34*5 = 9.28%
The expected return rate for WalMart Stores (WMT) is 2.58+0.37*5 = 4.43%
4. Compare the required return on these stocks calculated using CAPM in question #3 against their historical return over the last 52 weeks, found in the Yahoo!Finance Profile. Is there a difference between these returns? Is this a problem? Why is there a difference?
I do not understand how to get the answer for question #4. Thank you
Explanation / Answer
The 52 week average return of the company,
Ford Motor is 9.86%
52 week WAlmart avg change = 1.67%
it means walmart is highly overvalued.
it is similar to the expected return that we have calculated
Actual return is an investor's real gain or loss.
Actual Return = Expected Return+ Effect of Firm-Specific and Economy-Wide News
The discrepancy between actual and expected return is due to systematic and unsystematic risk
and suppose the
actual return > expected return (calculated by CAPM) it means stock is overvalued in the market and its high time to sell those stock because there price will fall in future
similarly,
if actual return< expected return (calculated by CAPM) it means stock is undervalued and its price may rise in future so its high time that we should buy those stock,
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