1138 Words5 Pages

Chapter 8
Problem 6
The following are the historic returns for the Chelle Computer Company:
Year Chelle Computer General Index
Year chelle computer general index 1 37 15 2 9 13 3 -11 14 4 8 -9 5 11 12 6 4 9
Based on this information, compute the following:
a. The correlation coefficient between Chelle Computer and the General Index.
Answer : r= .1305
b. The standard deviation for the company and the index
Answer: sd of company= 14.209, sd of index= 8.266
c. The beta for the Chelle Computer Company
Answer: beta= .00759
Problem 8
8. As an equity analyst, you have developed the following return forecasts and risk estimates for two different*…show more content…*

= Cov i,m/(m)2 Cov i,m = 187.4 m2 = 190.4 Using the proxy: using proxy = 187.4/190.4 = .984 The true index the covariance = 176.4 using true = 176.4/168 = 1.05 c. Proxy E(RR) = 0.08 + 0.984(0.12 - 0.08) = 0.08 + 0.0394 = .1194 or 11.94 percent True market E(RR) = 0.06 + 1.05(0.12 – 0.06) = 0.06 + 0.063 = 0.123 or 12.3 percent Chapter 9 Problem 3 You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: ƛMKT=7.5%, ƛMACRO1= -0.3%, and ƛMACRO2= 0.6%. You have also estimated the following factor betas (i.e. loadings) for all three stocks with respect to each of these potential risk factors: FACTOR LOADING Stock MKT MACRO1 MACRO2 QRS 1.24 -0.42 0.00 TUV 0.91 0.54 0.23 WXY 1.03 -0.09 0.00 a) Calculated expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. b) Calculate the expected returns for the three stocks using all three risk factors

= Cov i,m/(m)2 Cov i,m = 187.4 m2 = 190.4 Using the proxy: using proxy = 187.4/190.4 = .984 The true index the covariance = 176.4 using true = 176.4/168 = 1.05 c. Proxy E(RR) = 0.08 + 0.984(0.12 - 0.08) = 0.08 + 0.0394 = .1194 or 11.94 percent True market E(RR) = 0.06 + 1.05(0.12 – 0.06) = 0.06 + 0.063 = 0.123 or 12.3 percent Chapter 9 Problem 3 You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: ƛMKT=7.5%, ƛMACRO1= -0.3%, and ƛMACRO2= 0.6%. You have also estimated the following factor betas (i.e. loadings) for all three stocks with respect to each of these potential risk factors: FACTOR LOADING Stock MKT MACRO1 MACRO2 QRS 1.24 -0.42 0.00 TUV 0.91 0.54 0.23 WXY 1.03 -0.09 0.00 a) Calculated expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. b) Calculate the expected returns for the three stocks using all three risk factors

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