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EVALUATING RISK AND RETURN Bartman Industrie's arul Reynolds Inc.'s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2012-2017. 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 toss, 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 2012 because you do not have 2011 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. Assume the risk-free rate during this time was 3%. Calculate the Sharpe ratios for Bartram, Reynolds, and the Index over this period using their average returns. e. 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. f. 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? g. Assume that the risk-free rate on long-term.Treasury bonds is 4.5 %. 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 10%. as the expected return on the market. Use the SML equation to calculate the two companies' required returns. h. If you formed a portfolio that consisted of 50% .Bartman and 50% Reynolds, what would the portfolio's beta and required return be? i. 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 ate 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Bartman, 15% ot Stock A,40% of Stock B, and 20% of Stock C.

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 8, Problem 22SP
Textbook Problem

EVALUATING RISK AND RETURN Bartman Industrie's arul Reynolds Inc.'s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2012-2017. The Winslow 5000 data are adjusted to include dividends.

Chapter 8, Problem 22SP, EVALUATING RISK AND RETURN Bartman Industrie's arul Reynolds Inc.'s stock prices and dividends,

  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 toss, 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 2012 because you do not have 2011 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. Assume the risk-free rate during this time was 3%. Calculate the Sharpe ratios for Bartram, Reynolds, and the Index over this period using their average returns.
  5. e. 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.
  6. f. 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?
  7. g. Assume that the risk-free rate on long-term.Treasury bonds is 4.5 %. 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 10%. as the expected return on the market. Use the SML equation to calculate the two companies' required returns.
  8. h. If you formed a portfolio that consisted of 50% .Bartman and 50% Reynolds, what would the portfolio's beta and required return be?
  9. i. 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 ate 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Bartman, 15% ot Stock A,40% of Stock B, and 20% of Stock C.

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Chapter 8 Solutions

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Ch. 8 - Suppose you owned a portfolio consisting of...Ch. 8 - The probability distribution of a less risky...Ch. 8 - A life insurance policy is a financial asset, with...Ch. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - If a companys beta were to double, would its...Ch. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Suppose you own Stocks A and B. Based on data over...Ch. 8 - ABC Company's, stock earned a return of 10% this...Ch. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 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 A and B 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 2.0,...Ch. 8 - CAPM AND REQUIRED RETURN Beale Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...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 Industrie's...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...Ch. 8 - Using Past Information to Estimate Required...

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