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
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 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
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 |
|
|
|
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
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