Project #11367 - Assignment



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Chapter 24 Question 24-2 page 964

Security A has an expected rate of return of 6%, a standard deviation of return of 30%, a correlation coefficient with the market of -0.25 and a beta coefficient of -0.5. Security B has an expected return of 11%, a standard deviation of return of 10%, a correlation with the market of 0.75 and a beta coefficient of 0.5.

 Which security is more risky? Why?

Chapter 24 problem 24-8 pages 966-967

You are given the following set of data:

            Historical Rates of Return

Year                 NYSE                          Stock Y

1                      4.0%                            3.0%

2                      14.3                             18.2

3                      19.0                             9.1

4                      -14.7                            -6.0

5                      -26.5                            -15.3

6                      37.2                             33.1

7                      23.8                             6.1

8                      -7.2                              3.2

9                      6.6                               14.8

10                    20.5                             24.1

11                    30.6                             18.0

Mean               9.8%                            9.8%

?                     19.6%                          13.8%


a.     Construct a scatter diagram showing the relationship between returns on Stock Y and the market. Use a spreadsheet or calculator with a linear regression function to estimate beta.

b.     Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y’s volatility and relative risk as compared with those of other stocks.


c.      Suppose the regression lines were exactly as shown by your graph from part b but the scatter of points were more spread out. How would this affect (1) the firm’s risk if the stock is held in a one-asset portfolio and (2) the actual risk premium on the  on the stock if the CAPM hold exactly?


d.     Suppose the regression line were downward sloping and the beta coefficient were negative. What would this imply about (1) Stock Y’s relative risk, (2) its correlation with the market, and (3) it’s probable risk premium?

Subject Business
Due By (Pacific Time) 08/27/2013 06:00 pm
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