The Following Information Is Available in General and About Investments

question 176

Essay

The following information is available in general and about investments in stocks J and K.
$\begin{array}{ll}\text { The market return \( \left(\mathrm{k}_{\mathrm{M}}\right) \)}&=9 \% \\\text { The risk free rate \( \left(k_{\mathrm{RF}}\right) \)}&=5 \%\\\text {Stock J's beta }&=0.8\\\text {Expected constant growth rate for Stock J }&=6 \%\\\text {Investment in Stock J}&=\$ 80,000\\\text {Stock \( \mathrm{K}^{\prime} \) 's beta}&=1.4\\\text {Expected constant growth rate for Stock K }&=7 \% \\\text {Investment in Stock K }&=\$ 120,000\\\end{array}$
a. What are the expected returns on Stock J and Stock K individually?
b. What is the expected return on the portfolio?
c. If Stock K just paid a dividend of $2.50, what is Stock K's intrinsic value?

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Definitions:

Demand

Demand is the quantity of a product or service that consumers are willing and able to purchase at various prices during a given period.

Resource

An economic or productive factor required to accomplish an activity, or to provide a benefit to the economy, such as raw materials, labor, and capital.

High Demand

A situation in which the desire for a product or service exceeds the available supply, often leading to higher prices.

Low Demand

A situation where the desire or need for a particular product or service is less than the supply available.