1. Consider two stocks A and B and a market index M with the following past returns:MonthA23359B2M1.54134The risk-free rate is 1%.a.Write the estimated market model equations for both stocks and a portfolio composed of60% A and 40% B.b. Compute the coefficients of determinations.C.Estimate the returns at equilibrium for A and B and decide whether the stocks are over orundervalued.d. Compute Sharpe's, Treynor's and Jensen's performance measures for the portfolio.Consider a market with an

ERi=Rf+βi(ERm−Rf) where:ERi=expected return of investment Rf=risk-free rate βi=beta of the…

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A and 40% B. Compute the coefficient Estimate the market model equations for both stocks and

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

1. Consider two stocks A and B and a market index M with the following past returns:
Month
A
2
3
3
5
9
B
2
M
1.5
4
1
3
4
The risk-free rate is 1%.
a.
Write the estimated market model equations for both stocks and a portfolio composed of
60% A and 40% B.
b. Compute the coefficients of determinations.
C.
Estimate the returns at equilibrium for A and B and decide whether the stocks are over or
undervalued.
d. Compute Sharpe's, Treynor's and Jensen's performance measures for the portfolio.
Consider a market with an

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Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 3.2% + 1.10RM + EA RB = -1.4% + 1.25RM + eB OM = 30%; R-squarea = 0.28; R-squareB = 0.12 Break down the variance of each stock to the systematic and firm-specific components. (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.) Risk for A Risk for B Systematic Firm-specific
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