Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 4.13 -275 231 313.60 Correlation with Market Index 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32 - 0.88 0.74 1.00 CAPM Req. Return 7.00 % 17.54 % -0.02% 12.89% 15.00% Valuation ( Overvalued / Undervalued/Fairly Valued) Valued Fairly Overvalued Undervalued Undervalued Fairly valued Nature of Stock (Aggressive/Defensive Defensive Aggressive Defensive Defensive Defensive Question - Using the data generated above a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter3: Data Visualization

Section: Chapter Questions

Problem 10P: The file Fortune500 contains data for profits and market capitalizations from a recent sample of...

See similar textbooks

Related questions

Question

Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow.

		% Return on T-Bills, Stocks and Market Index
States of Economy	Probability	T-Bills	Phillips	Pay-up	Rubber-Made	Market Index
Recession	0.2	7	-22	28	10	-13
Below Average	0.1	7	-2	14.7	-10	1
Average	0.3	7	20	0	7	15
Above Average	0.3	7	35	-10	45	29
Boom	0.1	7	50	-20	30	43
Mean		7	16.9	20.7	19.6	15
Variance (%) ^2		0	549.09	244.124	358.04	313.6
Standard Deviation		0	23.4326695	15.6244712	18.92194493	17.7087549
Coefficient of Variation		0	1.386548491	7.54805372	0.965405354	1.18058366
Covariance wit MP		0	4.13	-275	231	313.60
Correlation with Market Index			0.9953	-0.9953	0.6894	1.0000
Beta		0	1.32	- 0.88	0.74	1.00
CAPM Req. Return		7.00 %	17.54 %	-0.02%	12.89%	15.00%
Valuation ( Overvalued / Undervalued/Fairly Valued)		Valued Fairly	Overvalued	Undervalued	Undervalued	Fairly valued
Nature of Stock (Aggressive/Defensive		Defensive	Aggressive	Defensive	Defensive	Defensive

Question - Using the data generated above

a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph

Expert Solution

Step by step

Solved in 5 steps with 11 images

SEE SOLUTION Check out a sample Q&A here

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.