1. Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $46. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.4%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as follows. Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%) Treasury bills 3.8 Treasury bonds 5.3 1.5 Common stocks 11.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 2. Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2013 33.30 0.12 2014 13.20 0.12 2015 −3.50 0.12 2016 14.50 0.07 2017 23.80 0.09 Required: a. What was the risk premium on common stock in each year? Year Risk Premium 2013 % 2014 % 2015 % 2016 % 2017 % · b. What was the average risk premium? Average risk premium % c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Standard deviation % 3. A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $2 per share and sells for $59. Required: a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $44. What are the dividend yield and percentage capital gain in this case? 4. You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. a. What is the rate of return on your investment if the end-of-year stock price is (i) $38; (ii) $40; (iii) $46? (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers as a whole percent.) Stock Price Rate of Return 38 % 40 % 46 % b. What is your real (inflation-adjusted) rate of return if the inflation rate is 3%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Stock Price Real Rate of Return 38 % 40 % 46 % 5. Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −8 % 21 % Normal economy 0.50 22 % 9 % Boom 0.20 32 % 9 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? multiple choice · No · Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 deci ...