CASE3: Data as given are shown below: Year Bartman Reynolds Market Index Stock Price Dividend Stock Price Dividend 2020 $17.250 $1.150 $48.750 $3.000 11,663.98 2019 14.750 1.06 52.300 2.90 8,785.70 2018 16.500 1.000 48.750 2.750 8,679.98 2017 10.750 0.950 57.250 2.500 6,434.03 2016 11.375 0.900 60.000 2.250 5,602.28 2015 7.625 0.850 55.750 2.000 4,705.97 Use the data given to calculate annual returns for Bartman and Reynolds, and the Market Index, and then calculate average returns over the five-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 2015 because you do not have 2014 data.) Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.) Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index. Construct a scatter diagram graph that shows Bartman’s and Reynolds’ returns on the vertical axis and the market index’s returns on the horizontal axis. Estimate Bartman’s and Reynolds’ betas by running regressions of their returns against the Market Index's returns. Are these betas consistent with your graph? Explain. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies required returns. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and its required return? Suppose an investor wants to include Bartman Industries’ stock in his or her 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 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20 percent of Stock C.

CASE3: Data as given are shown below: Year Bartman Reynolds Market Index Stock Price Dividend Stock Price Dividend 2020 $17.250 $1.150 $48.750 $3.000 11,663.98 2019 14.750 1.06 52.300 2.90 8,785.70 2018 16.500 1.000 48.750 2.750 8,679.98 2017 10.750 0.950 57.250 2.500 6,434.03 2016 11.375 0.900 60.000 2.250 5,602.28 2015 7.625 0.850 55.750 2.000 4,705.97 Use the data given to calculate annual returns for Bartman and Reynolds, and the Market Index, and then calculate average returns over the five-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 2015 because you do not have 2014 data.) Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.) Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index. Construct a scatter diagram graph that shows Bartman’s and Reynolds’ returns on the vertical axis and the market index’s returns on the horizontal axis. Estimate Bartman’s and Reynolds’ betas by running regressions of their returns against the Market Index's returns. Are these betas consistent with your graph? Explain. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies required returns. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and its required return? Suppose an investor wants to include Bartman Industries’ stock in his or her 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 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20 percent of Stock C.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 3AIC

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CASE3: Data as given are shown below:

Year	Bartman	Reynolds	Market Index
Stock Price	Dividend	Stock Price	Dividend
2020	$17.250	$1.150	$48.750	$3.000	11,663.98
2019	14.750	1.06	52.300	2.90	8,785.70
2018	16.500	1.000	48.750	2.750	8,679.98
2017	10.750	0.950	57.250	2.500	6,434.03
2016	11.375	0.900	60.000	2.250	5,602.28
2015	7.625	0.850	55.750	2.000	4,705.97

Use the data given to calculate annual returns for Bartman and Reynolds, and the Market Index, and then calculate average returns over the five-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 2015 because you do not have 2014 data.)
Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index.
Construct a scatter diagram graph that shows Bartman’s and Reynolds’ returns on the vertical axis and the market index’s returns on the horizontal axis.
Estimate Bartman’s and Reynolds’ betas by running regressions of their returns against the Market Index's returns. Are these betas consistent with your graph? Explain.
The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies required returns.
If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and its required return?
Suppose an investor wants to include Bartman Industries’ stock in his or her 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 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20 percent of Stock C.

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