You have $20,000. After the “success” of the sequel of the “Hunger Games”, you want to...

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You have $20,000. After the “success” of the sequel of the“Hunger Games”, you want to know if Lions Gate EntertainmentCorp. (NYSE:LGE) is a good buy. The firm’s total risk is 19%,its systematic risk is 0.57, the t-bill rate is 2.0%, the 30 yeartreasury rate is 3.5%, and the average market return is 8.8%.
What is the expected return on Lions Gate EntertainmentCorp?
Assume you constructed a DCF model to evaluate Lions GateEntertainment Corp and you found that the current market priceof the stock implies an expected return of 8.05% [Note: You do notactually have to do a DCF model for this problem]. Given you answerin part (a), is the firm overvalued, undervalued, or properlypriced? Explain.
You are considering an investment in firm ABC. You know therisk free rate is 3.5%, the expected return on the market portfoliois 8.8%, and the standard deviation of the market portfolio is15.35%. You also know that stock ABC has a standard deviation of45.3% but it is uncorrelated with the market portfolio.
What is the beta of stock ABC?
According to the CAPM, what is the expected return on stockABC?
You know that firm ABC has a higher standard deviation than themarket portfolio. How do you explain the return in part (b) and thefact that is has a high standard deviation? In particular, what doyou know about the risk?

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3.9 Ratings (731 Votes)

Ans 1 A According to Capital Asset Pricing Model CAPM Expected Return of a stock Risk free rate Beta Expected return of marketrisk free rate Ra Rrf See Answer

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You have $20,000. After the “success” of the sequel of the“Hunger Games”, you want to know if Lions Gate EntertainmentCorp. (NYSE:LGE) is a good buy. The firm’s total risk is 19%,its systematic risk is 0.57, the t-bill rate is 2.0%, the 30 yeartreasury rate is 3.5%, and the average market return is 8.8%.What is the expected return on Lions Gate EntertainmentCorp?Assume you constructed a DCF model to evaluate Lions GateEntertainment Corp and you found that the current market priceof the stock implies an expected return of 8.05% [Note: You do notactually have to do a DCF model for this problem]. Given you answerin part (a), is the firm overvalued, undervalued, or properlypriced? Explain.You are considering an investment in firm ABC. You know therisk free rate is 3.5%, the expected return on the market portfoliois 8.8%, and the standard deviation of the market portfolio is15.35%. You also know that stock ABC has a standard deviation of45.3% but it is uncorrelated with the market portfolio.What is the beta of stock ABC?According to the CAPM, what is the expected return on stockABC?You know that firm ABC has a higher standard deviation than themarket portfolio. How do you explain the return in part (b) and thefact that is has a high standard deviation? In particular, what doyou know about the risk?