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

Related

- Good Essays
## Essay on Assignment 1

- 1298 Words
- 6 Pages

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

- 1298 Words
- 6 Pages

Good Essays - Satisfactory Essays
## Essay Fin 601 Final Exam - Multiple Choice Questions & Answers

- 2436 Words
- 10 Pages

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

- 2436 Words
- 10 Pages

Satisfactory Essays - Decent Essays
## Ameritrade Case

- 789 Words
- 4 Pages

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

- 789 Words
- 4 Pages

Decent Essays - Decent Essays
## Essay on Week 4 Assignment

- 1193 Words
- 5 Pages

C:4‑29 Current E&P Computation. Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available:

- 1193 Words
- 5 Pages

Decent Essays - Decent Essays
## Essay on Assignment Wk3

- 713 Words
- 3 Pages

1. The pressure announced on last night's television weather broadcast was 29.92. Explain how this was measured and give the units. Would this be considered an unusually large or low pressure value?

- 713 Words
- 3 Pages

Decent Essays - Satisfactory Essays
## Fin 419 Week 2 Problems

- 1869 Words
- 8 Pages

a. Calculate the expected return over the 4-year period for each of the three alternatives.

- 1869 Words
- 8 Pages

Satisfactory Essays - Better Essays
## assignment 1 Essay

- 1438 Words
- 6 Pages

1. Describe two examples of important things that financial planning skills can help you do, and explain why these things are important to you personally. (4-6 sentences. 2.0 points)

- 1438 Words
- 6 Pages

Better Essays - Better Essays
## Assignment 2 Essay

- 1059 Words
- 5 Pages

2. Draw a flow diagram of the unit operations involved in sugar refining and at each step write a brief sentence explaining what is occurring. Use the information from SKIL site to develop your flow chart. Since the information does not start from the beginning of the refining process, please include an extraction step (extraction is explained in your textbook). Either milling or diffusion is

- 1059 Words
- 5 Pages

Better Essays - Decent Essays
## Week 6 Assignment 1 Essay

- 754 Words
- 4 Pages

Offer- This is defined as a clear manifestation of willingness to enter an agreement made by another person with full understanding that their assent to the bargain is an invitation and is concluded.

- 754 Words
- 4 Pages

Decent Essays - Good Essays
## Homework Chapter 3 Essay

- 1578 Words
- 7 Pages

1) You can call the module several times instead of writing it out each time.

- 1578 Words
- 7 Pages

Good Essays - Better Essays
## Assignment 1 Essay

- 1556 Words
- 7 Pages

Read the following short essay, and then write a 3-5 page response (12-point font, double-spaced, normal margins, no cover page, no binders). Your response should do the following three things: (1) state what the main conclusion of the essay is; (2) state what the most important premises (including sub-conclusions) are—i.e., state which premises are most important if the argument is to rationally convince its audience; (3) evaluate the quality of the argument, giving detailed reasons to justify your evaluation. For purposes of evaluation, assume that the speaker is a contemporary Canadian philosopher and the audience is a group of students in Introduction to Philosophy.

- 1556 Words
- 7 Pages

Better Essays - Good Essays
## Assignment 08 Essay

- 1277 Words
- 6 Pages

In the parenthesis enter the cell number and letter to find total expenses per week. (i.e.) =sum(b5:b11)

- 1277 Words
- 6 Pages

Good Essays - Decent Essays
## Case questions Essay

- 1051 Words
- 5 Pages

a. What risk-free rate and risk premium did you use to calculate the cost of equity?

- 1051 Words
- 5 Pages

Decent Essays - Satisfactory Essays
## Portfolio Management: Practice Problems

- 1301 Words
- 6 Pages

d. What would be the investor 's certainty equivalent return for the optimally chosen combination? 2. Consider an investor who has an asset allocation of 50% in equities and the rest in T-Bills. Suppose the expected rate of return on equities is 10%/year and the standard deviation of the return on equities is 15%/year. T-Bills earn 6%/year. a. What is the implied risk aversion coefficient of the investor?

- 1301 Words
- 6 Pages

Satisfactory Essays - Satisfactory Essays
## Essay on Alex Sharpe

- 585 Words
- 3 Pages

We can’t figure out the riskiness of the stock by just looking at the expected return. In the case of individual stock, Reynolds at 1.87 is giving a higher return compared to Hasbro at 1.18. We wouldn’t know the riskiness unless we look at the standard deviation or the variance of the stock. By comparing the two, Reynolds has a higher variance and standard deviation and will be more risky.

- 585 Words
- 3 Pages

Satisfactory Essays