Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 6, Problem 4P
An analyst gathered daily stock returns for Feburary 1 through March 31, calculated the Fama-French factors for each day in the sample (SMBt and HMLt), and estimated the Fama-French regression model shown in Equation 6-21. The estimated coefficients were ai = 0, bi = 1.2, ci = −0.4, and di = 1.3. On April 1, the market return was 10%, the return on the SMB portfolio (rSMB) was 3.2%, and the return on the HML portfolio (rHML) was 4.8%. Using the estimated model, what was the stock’s predicted return for April 1?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
An analyst gathered daily stock returns for February 1 through March 31, calculated the Fama-French factors for each day in the sample (SMBt and HML), and estimated the Fama-French regression model shown in Equation 6-21. The estimated coefficients were ai= 0, bi= 1.2, ci= -0.4, and di= 1.3. On April 1, the market return was 10%, the return on the SMB portfolio (rSMB) was 3.2%, and the return on the HML portfolio (rHML) was 4.8%. Using the estimated model, what was the stock’s predicted return for April 1?
The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.
Month
Madison Cookies
Sophie Electric
1
-0.04
0.07
2
0.06
-0.02
3
-0.07
-0.10
4
0.12
0.15
5
-0.02
-0.06
6
0.05
0.02
Compute the following:
a. Average monthly rate of return, Ri, for each stock
b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return
What level of correlation would you have expected before performing your calculations? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?
The following are the end-of-month prices for both the Standard & Poor's 500 Index and Nike's common stock.
a. Using the data in the popup window, calculate the holding-period returns for each of the months.
b. Calculate the average monthly return and the standard deviation for both the S&P 500 and Nike.
c. Develop a graph that shows the relationship between the Nike stock returns and the S&P 500 Index. (Show the Nike returns on the vertical axis and the S&P 500 Index returns on the horizontal axis.)
d. From your graph, describe the nature of the relationship between Nike stock returns and the returns for the S&P 500 Index.
Chapter 6 Solutions
Financial Management: Theory & Practice
Ch. 6 - The probability distribution of a less risky...Ch. 6 - Security A has an expected return of 7%, a...Ch. 6 - If investors’ aversion to risk increased, would...Ch. 6 - Prob. 5QCh. 6 - Your investment club has only two stocks in its...Ch. 6 - Prob. 2PCh. 6 - Suppose that the risk-free rate is 5% and that the...Ch. 6 - An analyst gathered daily stock returns for...Ch. 6 - A stocks return has the following distribution:...Ch. 6 - The market and Stock J have the following...
Ch. 6 - Suppose rRF = 5%, rM = 10%, and rA = 12%. a....Ch. 6 - As an equity analyst you are concerned with what...Ch. 6 - Your retirement fund consists of a $5,000...Ch. 6 - Prob. 10PCh. 6 - You have a $2 million portfolio consisting of a...Ch. 6 - Stock R has a beta of 1.5, Stock S has a beta of...Ch. 6 - You are considering an investment in either...Ch. 6 - You have observed the following returns over...Ch. 6 - What are investment returns? What is the return on...Ch. 6 - Graph the probability distribution for the bond...Ch. 6 - Use the scenario data to calculate the expected...Ch. 6 - What is the stand-alone risk? Use the scenario...Ch. 6 - Your client has decided that the risk of the bond...Ch. 6 - Your client is shocked at how much risk Blandy...Ch. 6 - Explain correlation to your client. Calculate the...Ch. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MCCh. 6 - Calculate the correlation coefficient between...Ch. 6 - Prob. 13MCCh. 6 - (1) Suppose the risk-free rate goes up to 7%. What...Ch. 6 - Your client decides to invest $1.4 million in...Ch. 6 - Jordan Jones (JJ) and Casey Carter (CC) are...Ch. 6 - What does market equilibrium mean? If equilibrium...Ch. 6 - What is the Efficient Markets Hypothesis (EMH),...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The following table reports the percentage of stocks in a portfolio for nine quarters: a. Construct a time series plot. What type of pattern exists in the data? b. Use trial and error to find a value of the exponential smoothing coefficient that results in a relatively small MSE. c. Using the exponential smoothing model you developed in part (b), what is the forecast of the percentage of stocks in a typical portfolio for the second quarter of year 3?arrow_forwardA sample containing years to maturity and (percent) yield for 40 corporate bonds is contained in the file named CorporateBonds (Barron’s, April 2. 2012). Develop a scatter chart of the data using years to maturity as the independent variable. Does a simple linear regression model appear to be appropriate? Develop an estimated quadratic regression equation with years to maturity and squared values of years to maturity as the independent variables. How much variation in the sample values of yield is explained by this regression model? Test the relationship between each of the independent variables and the dependent variable at a 0.05 level of significance. How would you interpret this model? Create a plot of the linear and quadratic regression lines overlaid on the scatter chart of years to maturity and yield. Does this helps you better understand the difference in how the quadratic regression model and a simple linear regression model fit the sample data? Which model does this chart suggest provides a superior fit to the sample data? What other independent variables could you include in your regression model to explain more variation in yield?arrow_forwardThe following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period. Month Madison Cookies Sophie Electric 1 -0.04 0.07 2 0.06 -0.02 3 -0.07 -0.10 4 0.12 0.15 5 -0.02 -0.06 6 0.05 0.02 Compute the following: a) Average monthly rate of return for each stock b) Standard deviation of returns for each stock c) Covariance between the rates of returns d) The correlation coefficient between the rates of return e) What level of correlation would you have expected before performing your calculations? f) How did your expectations compare with the computed correlation? g) Would these two stocks be good choices for diversification? Why or why not?arrow_forward
- Say that an analyst has looked at a random sample of 50 companies in the S&P 500 to understand the association between a stock's P/E ratio and subsequent 12-month performance in the market. Assume that the resulting estimate is -0.20, indicating that for every 1.0 point in the P/E ratio, stocks return 0.2% poorer relative performance. In the sample of 52, the standard deviation was found to be 2.7. What is the standard of error?arrow_forwardThe following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period. Month Madison Cookies Sophie Electric 1 −0.04 0.072 0.06 −0.023 −0.07 −0.104 0.12 0.155 −0.02 −0.066 0.05 0.02 Compute the following. a. Average monthly rate of return Ri for each stockb. Standard deviation of returns for each stockc. Covariance between the rates of returnd. The correlation coefficient between the rates of returnWhat level of correlation did you expect? How did your expectations compare with the computed…arrow_forwardHere are the returns on two stocks. \table[[,\table[[Digital],[Cheese]],\table[[Executive],[Fruit]]],[January,+15,+8],[February,-2,+1],[March,+4,+6],[April,+6,+16],[May,-3,+2],[June,+2,+6],[July,-1,-2],[August,-7,-1]] Required: a-1. Calculate the variance and standard deviation of each stock. a-2. Which stock is riskier if held on its own? b. Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks. c. Is the variance more or less than halfway between the variance of the two individual stocks? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Calculate the variance and standard deviation of each stock. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. \table[[,\table[[Digital Cheese],[Retum]],\table[[Executive Fruit],[Return]],],[Variance,,%,%arrow_forward
- Here are the returns on two stocks. Digital Cheese Executive Fruit January +17 +6 February -4 +1 March +6 +5 April +8 +15 May -5 +2 June +4 +4 July -3 -4 August -9 -3 a. Calculate the variance and standard deviation of each stock. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Digital Cheese Return Executive Fruit Return Variance % % Standard Deviation % % b. Which stock is riskier if held on its own? c. Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) d.…arrow_forwardDetermine the expected standard deviation of a stock that an investment manager has determined that has three possible return outcomes over the next 12 months; -6.45%, 9.85% and 13.05%, for which she has assigned the following probabilities of occurring; 12.5%, 72.5% and 15.0% respectively 5.69% 8.87% 12.74% 0.32%arrow_forwardThe attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)arrow_forward
- You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: –29.7 percent, 16.8 percent, 36.6 percent, 3.9 percent, and 22.9 percent. a. What was the arithmetic average return on the stock over this five-year period? b. What was the variance of the returns over this period? c. What was the standard deviation of the returns over this period?arrow_forwardThe following shows the expected percentage returns on three stocks over the next six years:Stock Percentage Return (%)Year 1 2 3 4 5 6A 10 5 6 8 12 15B 8 4 4. 80 6.4 9.6 12C 5 10 12 10 6 6 Required:(i) Find the expected return for each of the stock.(ii) Compute the variance and standard deviation for stock A, B and C. Show your working.(iii) Justify how can you minimize the risk of the above combination of stocks. (Must show working method as well)arrow_forwardConsider the two (excess return) index-model regression results for stocks A and The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns. Stock A Stock B Index model regression estimates 1% + 1.2(rM – rf ) 2% + 0.8(rM – rf ) R-square 0.576 0.436 Residual standard deviation, σ(e) 10.3% 19.1% Standard deviation of excess returns 21.6% 24.9% Calculate the following statistics for each stock: Alpha Information ratio Sharpe ratio Treynor measure Which stock is the best choice under the following circumstances? This is the only risky asset to be held by the investor. This stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market-index fund. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningEssentials Of Business AnalyticsStatisticsISBN:9781285187273Author:Camm, Jeff.Publisher:Cengage Learning,
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Essentials Of Business Analytics
Statistics
ISBN:9781285187273
Author:Camm, Jeff.
Publisher:Cengage Learning,
Portfolio Management; Author: DevTechFinance;https://www.youtube.com/watch?v=Qmw15cG2Mv4;License: Standard YouTube License, CC-BY