Investment Analysis question

Question

 The Intel Semiconductor company has a beta of 1.40, the expected return on the S&P500 is 11.5%, and the 10-year US Treasury Bond Yields 5%. You expect the stock to outperform the S&P500 by 2% (i.e., alpha = 2%)

 

What is the expected rate of return on NVIDIA stock?

 

a. 13.5%

b. 23.100%

c. 16.100%

d. 21.100%

Answer 1

The expected rate of return on a stock using the Capital Asset Pricing Model (CAPM) is given by the formula:

Expected Return=Risk-Free Rate+×(Market Return−Risk-Free Rate)+AlphaExpected Return=Risk-Free Rate+β×(Market Return−Risk-Free Rate)+Alpha

Where:

Risk-Free Rate is the yield on a risk-free investment, typically the yield on the 10-year US Treasury Bond.

Beta (β) is the stock's beta.

Market Return is the expected return on the market, typically represented by the S&P500.

Alpha is the expected excess return (stock's expected outperformance over the market).

Let's substitute the given values:

Expected Return=0.05+1.40×(0.115−0.05)+0.02Expected Return=0.05+1.40×(0.115−0.05)+0.02

Calculate the values:

Expected Return=0.05+1.40×0.065+0.02Expected Return=0.05+1.40×0.065+0.02

Expected Return=0.05+0.091+0.02Expected Return=0.05+0.091+0.02

Expected Return=0.161Expected Return=0.161

Convert this to a percentage:

Expected Return=16.1%Expected Return=16.1%

So, the expected rate of return on NVIDIA stock, based on the provided information, is 16.1%. Therefore, the correct answer is:

c. 16.100%