The following table shows estimates of the risk of two well-known Canadian stocks: Standard Standard Deviation (%) R2 Beta Error of Beta Sun Life Financial 25.7 0.19 0.95 0.16 Loblaw 30.5 0.01 0.21 0.27 What proportion of each stock’s risk was market risk, and what proportion was specific risk? What is the variance of the returns for Sun Life Financial stock? What is the specific variance? What is the confidence interval on Loblaw's beta? If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 4% and an expected market return of 13%. Suppose that next year, the market provides a 18% return. Knowing this, what return would you expect from Sun Life?
The following table shows estimates of the risk of two well-known Canadian stocks: Standard Standard Deviation (%) R2 Beta Error of Beta Sun Life Financial 25.7 0.19 0.95 0.16 Loblaw 30.5 0.01 0.21 0.27 What proportion of each stock’s risk was market risk, and what proportion was specific risk? What is the variance of the returns for Sun Life Financial stock? What is the specific variance? What is the confidence interval on Loblaw's beta? If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 4% and an expected market return of 13%. Suppose that next year, the market provides a 18% return. Knowing this, what return would you expect from Sun Life?
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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
The following table shows estimates of the risk of two well-known Canadian stocks:
| Standard | Standard | |||
| Deviation (%) | R2 | Beta | Error of Beta | |
| Sun Life Financial | 25.7 | 0.19 | 0.95 | 0.16 |
| Loblaw | 30.5 | 0.01 | 0.21 | 0.27 |
- What proportion of each stock’s risk was market risk, and what proportion was specific risk?
- What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
- What is the confidence interval on Loblaw's beta?
- If the
CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 4% and an expected market return of 13%. - Suppose that next year, the market provides a 18% return. Knowing this, what return would you expect from Sun Life?
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Step 1: Given information of two well-known Canadian stocks
VIEWStep 2: Calculation of the proportion of each stock’s risk was market risk, and what proportion was specific
VIEWStep 3: Calculation of the variance of the returns for Sun Life Financial stock
VIEWStep 4: Calculation of the confidence interval on Loblaw's beta
VIEWStep 5: Calculation of the expected return on Sun Life
VIEWStep 6: Calculation of the expected return if the market provides a 18% return
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