a) Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca-cola. b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) B B A A A (A) (B) (C) c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (R:) is one-fourth of the required return on A. Return on market portfolio is denoted by Rm. Find the ratio of beta of A (Ba) to beta of B (Вв). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why.
a) Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca-cola. b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) B B A A A (A) (B) (C) c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (R:) is one-fourth of the required return on A. Return on market portfolio is denoted by Rm. Find the ratio of beta of A (Ba) to beta of B (Вв). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 15P
Related questions
Question
Transcribed Image Text:a) Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the
market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca-cola.
b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and
standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the
risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why?
E(R)
E(R)
E(R)
B
B
A
A
A
(A)
(B)
(C)
c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found
to be half of the required return (RB) on stock B. The risk-free rate (R:) is one-fourth of the required
return on A. Return on market portfolio is denoted by Rm. Find the ratio of beta of A (Ba) to beta of B
(Вв).
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether
asset A and B are overvalued or undervalued, and explain why.
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