1. Assume a risk-free rate of 6 percent, a benchmark expected excess return of 6.5 percent, and a...

Question

1. Assume a risk-free rate of 6 percent, a benchmark expected excess return of 6.5 percent, and a long-run benchmark expected excess return of 6 percent. Given that McDonald's has a beta of 1.07 and an expected total return of 15 percent, separate its expected return into

Time premium Risk premium

Exceptional benchmark return Alpha

Consensus expected return Expected excess return Exceptional expected return

What is the sum of the consensus expected return and the exceptional expected return?

Rochak · Accepted Answer

Time Premium = Expected total return – Benchmark expected excess return
= 15% - 6.5%
= 9.5%
Risk Premium = 5.5%
Exceptional benchmark return Alpha = Benchmark expected excess return – Risk-free rate
= 6.5% - 6.0%
= 0.5%
Consensus expected return = 0.

1. Assume a risk-free rate of 6 percent, a benchmark expected excess return of 6.5 percent, and a long-run benchmark expected excess return of 6 percent. Given that McDonald's has a beta of 1.07 and...

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