close solutoin list

EVALUATING RISK AND RETURN Bartman Industries’s and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2009–2014. The Winslow 5000 data are adjusted to include dividends. a. Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index. Then calculate each entity’s average return over the 5-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2009 because you do not have 2008 data.) b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, Equation 8.2a in this chapter, which corresponds to the STDEV function in Excel.) c. Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000. d. Construct a scatter diagram that shows Bartman’s and Reynolds’s returns on the vertical axis and the Winslow 5000 Index’s returns on the horizontal axis. e. Estimate Bartman’s and Reynolds’s betas by running regressions of their returns against the index’s returns. (Hint: Refer to Web Appendix 8A.) Are these betas consistent with your graph? f. Assume that the risk-free rate on long-term Treasury bonds is 6 04%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market’s required return—it is too high. So use 11% as the expected return on the market. Use the SML equation to calculate the two companies’ required returns. g. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolio’s beta and required return be? h. Suppose an investor wants to include Bartman Industries’s stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are 0 769, 0 985, and 1 423, respectively. Calculate the new portfolio’s required return if it consists of 25% of Bartman, 15% of Stock A, 40% of Stock B, and 20% of Stock C.

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

Solutions

Chapter
Section
Chapter 8, Problem 22SP
Textbook Problem

EVALUATING RISK AND RETURN Bartman Industries’s and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2009–2014. The Winslow 5000 data are adjusted to include dividends.

Chapter 8, Problem 22SP, EVALUATING RISK AND RETURN Bartman Industriess and Reynolds Inc.s stock prices and dividends, along

  1. a. Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index. Then calculate each entity’s average return over the 5-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2009 because you do not have 2008 data.)
  2. b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, Equation 8.2a in this chapter, which corresponds to the STDEV function in Excel.)
  3. c. Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000.
  4. d. Construct a scatter diagram that shows Bartman’s and Reynolds’s returns on the vertical axis and the Winslow 5000 Index’s returns on the horizontal axis.
  5. e. Estimate Bartman’s and Reynolds’s betas by running regressions of their returns against the index’s returns. (Hint: Refer to Web Appendix 8A.) Are these betas consistent with your graph?
  6. f. Assume that the risk-free rate on long-term Treasury bonds is 6 04%. Assume also that  the average annual return on the Winslow 5000 is not a good estimate of the market’s  required return—it is too high. So use 11% as the expected return on the market. Use  the SML equation to calculate the two companies’ required returns.
  7. g. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolio’s beta and required return be?
  8. h. Suppose an investor wants to include Bartman Industries’s stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are 0 769, 0 985, and 1 423, respectively. Calculate the new portfolio’s required return if it consists of 25% of Bartman, 15% of Stock A, 40% of Stock B, and 20% of Stock C.

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 8 Solutions

Fundamentals of Financial Management (MindTap Course List)
Show all chapter solutions
Ch. 8 - PORTFOLIO BETA An individual has 35,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks X and Y have the following...Ch. 8 - PORTFOLIO REQUIRED RETURN Suppose you are the...Ch. 8 - BETA COEFFICIENT Given the following information...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 1.5,...Ch. 8 - CAPM AND REQUIRED RETURN Bradford Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14%...Ch. 8 - CAPM, PORTFOLIO RISK. AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - EVALUATING RISK AND RETURN Bartman Industriess and...Ch. 8 - RISK AND RETURN Assume that you recently graduated...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Using Past Information to Estimate Required...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Why must researchers document their sources meticuousIy?

Essentials of Business Communication (MindTap Course List)

Should the United States attempt to reduce air and water pollution to zero? Why or why not?

Microeconomics: Private and Public Choice (MindTap Course List)