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 .0413 -.0275 .0231 .0314 Correlation with Market Index 0 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 - Plot the SML and answer the a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative b) Compute the expected return of the portfolio thus formed c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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% Return on T-Bills, Stocks and Market Index
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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 |
.0413 |
-.0275 |
.0231 |
.0314 |
|
Correlation with Market Index |
|
0 |
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 - Plot the SML and answer the
- a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative
- b) Compute the expected return of the portfolio thus formed
- c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
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