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Stock valuation/standard deviation/beta

11. Delilah, Inc. currently pays a $2.25 common stock dividend, with dividends expected to grow at a 4% rate over the long-term. Assuming a risk free rate of 4.25%, an expected return on the market of 10%, and a stock beta of 0.70, what should be the price of Delilah's stock?

12. Asset A has an expected return of 7% and a standard deviation of 15%; asset B has an expected return of 10% and a standard deviation of 20%. If the covariance (COV) of the two assets is 0.006, what is the standard deviation of the portfolio with a 50/50 allocation?

13. The S&P has a standard deviation of 18%. If stock ABC has a standard deviation of 15% and a correlation coefficient of 0.6 with the S&P, what is ABC's beta relative to the S&P?

Solution Preview

11. Since the growth rate is constant we can use the constant growth formula to calculate the stock price.
Stock Price = D1/(Required return - growth rate)
The required return can be calculated using the CAPM equation
Required return = Rf + (Rm-Rf) beta
Required return = 4.25% + (10%-4.25%) 0.70 = ...

Solution Summary

The solution explains three questions relating to stock valuation, standard deviation and calculation of beta