FIGURE 12.11 Monthly rates 40% of return for (a) Marathon Oil, (b) Intel, and (c) Walmart, plus the market portfolio for the five years (a) 30% ending December 2017 20% 10% 10% -10% -5% 5% -20% Beta 2.39 Std dev 43.7 % -30 % 30%-T (b) 25%+ 20%+ 15%- 10% 5% 506 -10% 10% -5% 5% 10% Beta 1.07 -15% Std dev 20.5% -20% Market return (%) FIGURE 12.11 (continued) 30% (c) 25% 20% 15% 10% 5% t. -5% Op 5% 5% -10% 10% -10% -15% Beta = 37 Std dev 16.4% -20 % Market return (%) Return on Walmart Marathon Oil return (%) Intel retum (%)

Question

Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock are given beside its plot.

Required:

a. Which stock is safest for a diversified investor?

b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks?

c. Consider a portfolio with equal investments in each stock. What would this portfolio’s beta have been?

d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%.

e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.

FIGURE 12.11 Monthly rates
40%
of return for (a) Marathon Oil,
(b) Intel, and (c) Walmart, plus the
market portfolio for the five years
(a)
30%
ending December 2017
20%
10%
10%
-10%
-5%
5%
-20%
Beta 2.39
Std dev 43.7 %
-30 %
30%-T
(b)
25%+
20%+
15%-
10%
5%
506
-10%
10%
-5%
5%
10%
Beta 1.07
-15%
Std dev 20.5%
-20%
Market return (%)
FIGURE 12.11 (continued)
30%
(c)
25%
20%
15%
10%
5% t.
-5%
Op
5%
5%
-10%
10%
-10%
-15%
Beta = 37
Std dev 16.4%
-20 %
Market return (%)
Return on Walmart
Marathon Oil return (%)
Intel retum (%)

Image Transcription

FIGURE 12.11 Monthly rates 40% of return for (a) Marathon Oil, (b) Intel, and (c) Walmart, plus the market portfolio for the five years (a) 30% ending December 2017 20% 10% 10% -10% -5% 5% -20% Beta 2.39 Std dev 43.7 % -30 % 30%-T (b) 25%+ 20%+ 15%- 10% 5% 506 -10% 10% -5% 5% 10% Beta 1.07 -15% Std dev 20.5% -20% Market return (%) FIGURE 12.11 (continued) 30% (c) 25% 20% 15% 10% 5% t. -5% Op 5% 5% -10% 10% -10% -15% Beta = 37 Std dev 16.4% -20 % Market return (%) Return on Walmart Marathon Oil return (%) Intel retum (%)

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