Question

You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10% and 5%, respectively. The dividend yields are 5% and 7%, respectively.

Since A offers higher potential growth, should it be purchased?
Investments- Individual Work 2 Page 3
Since B offers a higher dividend yield, should it be purchased?
If the risk-free rate of return were 7% and the return on the market is expected to be 14%, which of these stocks should be bought?

Answer 1

a) Yes , Cause The Expected Returns of stock A is Higher than that of B

b) No, Cause The Expected Returns of stock B is Lower than that of A

Explanation:

From the question we are told that:

Beta A \beta A=1.4

Beta B \beta B=0.8

Stock 1 Growth rates of earnings and dividends G_1=10\%

Stock 2 Growth rates of earnings and dividends G_2=5\%

Stock 1 Dividend yields D_1=5\%

Stock 2 Dividend yields D_2=7\%

Generally the equation for Expected Returns is mathematically given by

Expected Returns =Growth rates+Dividend yields

For Stock 1

Expected\ Returns =G_1+D_1

Expected\ Returns =5%+10%

Expected\ Returns =15%

For Stock 2

Expected\ Returns =G_2+D_2

Expected\ Returns =7%+5%

Expected\ Returns =12%

Therefore

a) Yes , Cause The Expected Returns of stock A is Higher than that of B

b) No, Cause The Expected Returns of stock B is Lower than that of A