Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use Merrill Lynch adjusted betas.
A) 15.0%
B) 15.5%
C) 16.0%
D) 16.8%
E) none of these

Question

Quizplus · Accepted Answer

To find the forecasted return on Mobil stock using Merrill Lynch adjusted betas, we need to use the following formula:
Expected Return = Risk-Free Rate + Beta*(Market Return - Risk-Free Rate) + Adjustment Factor
Here, the risk-free rate is 6%, the market return is 15%, and the unadjusted beta is 1.30. We also need to find the adjustment factor using Merrill Lynch adjusted betas table. According to the table, the adjustment factor for Mobil is 0.38.
Plugging in the values we get:
Expected Return = 6% + 1.30*(15% - 6%) + 0.38 = 16.8%
Therefore, the reasonable forecast of the return on Mobil stock for the coming year is 16.8%. 
The correct answer is D.

Suppose You Forecast That the Market Index Will Earn a Return