You are analyzing a regression of DePaolo Foods, a manufacturer of spaghetti and olive oil, against the S&P .500, using monthly returns over 5 years Return( DePaolo Foods) = -0.001 + 1.25 Returns(S&P 500) R2 = 0.25 Assume that you have been asked to be market neutral (assume that the market is correctly priced today). You have computed a historical risk premium of 0.065 by looking at returns on stocks and bonds from 1928 to 2001 and an implied equity premium of 0.045 based upon the S&P 500 today. If the current treasury bill rate is .0.025,the treasury bond rate is 0.047 Estimate the cost of equity for this firm .using the implied equity risk premium What proportion of firm's risk is diversifiable?

You are analyzing a regression of DePaolo Foods, a manufacturer of spaghetti and olive oil, against the S&P .500, using monthly returns over 5 years Return( DePaolo Foods) = -0.001 + 1.25 Returns(S&P 500) R2 = 0.25 Assume that you have been asked to be market neutral (assume that the market is correctly priced today). You have computed a historical risk premium of 0.065 by looking at returns on stocks and bonds from 1928 to 2001 and an implied equity premium of 0.045 based upon the S&P 500 today. If the current treasury bill rate is .0.025,the treasury bond rate is 0.047 Estimate the cost of equity for this firm .using the implied equity risk premium What proportion of firm's risk is diversifiable?

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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You have at hand the historical monthly excess returns of Strategy X over 12 months. In addition, you have the monthly excess returns to the market. The risk free rate is 2%. Excess returns (monthly) Strategy X Market 0.012 0.011 0.007 0.009 0.014 0.007 0.013 0.004 0.005 0.013 0.008 0.006 0.011 0.010 0.006 0.011 0.010 0.010 0.014 0.009 0.008 0.004 0.009 0.007 Required: Calculate the annualised CAPM alpha for Strategy X.
Indicate whether the following statements are true or false (circle one). Use 1 or 2 sentences to discuss why it is so. (a) If R, is simple 1-month return, then the annualized return is 12 x R, after assuming all R = R. True False Why? (b) Let and r GSA be continuously compounded 1 - month returns for Goldman Sachs Group (GS) and American International Group (AIG). If we construct a portfolio using the share ain[0, 1] for GS, the portfolio cc return is ľ AIG = 0x*y +(1-x)*r True False Why? (c) In 5. (b)., if 5% quantile of the portfolio cc return is given as AIG, GS, r 40.05 = -0.5, then 5% monthly Value-at-Risk for the $10,000 investment in this portfolio is $10,000 × (-0.5) = -$ 5,000. True False r
(a) A financial analyst would like to study the stock market in Hong Kong. It is believed that the stock market will become overvalue when one of the indicato Time left 1:5 price/earning (P/E) ratio is over 33.9. On this basis, he finds out 30 companies and records their P/E ratio as below: Round the data down to an integer (e.g., 29.7 will be 29) and then prepare a stem-and-leaf display for the rounded data. [Do not put space between digits (e.g., put 1123 instead of 1 1 2 3).] Stem Leaf 0 1 2 3 4 51.7 46.5 40.9 4.2 56.8 38.9 46.7 2.5 49.9 44.6 46.5 12.3 23.8 44.0 47.2 47.2 58.2 17.1 56.4 52.7 43.0 48.7 38.1 54.5 43.8 40.9 41.9 52.5 32.9 13.142.7 33.1 5
(Computing rates of return) From the following price data, compute the annual rates of return for Asman and Salinas. Time 1 2 3 12 4 14 (Click on the icon in order to copy its contents into a spreadsheet.) How would you interpret the meaning of the annual rates of return? Asman $9 11 Salinas $30 27 32 36 The rate of return you would have earned on Asman stock from time 1 to time 2 is %. (Round to two decimal places.)
You ran a regression of the excess return on Walmart's stock on the excess return on the market. You found the following: alpha=1.5%, beta-2.818, R^2=0.623. If Walmart's total volatility was 0.310 in that same period, what must have been the markets volatility in that same period.
Give typing answer with explanation and conclusion
An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN (Percent) 1.2 1.6 2.0 0.8 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. Which of the following statements best describes the shape of the SML if investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be steeper than it would be if…
If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company: High price Low price EPS Year 1 $ 62.18 40.30 2.35 a. High target price b. Low target price Year 2 $ 67.29 43.18 2.58 Year 3 $74.18 39.27 2.73 Year 4 $ 78.27 46.21 2.89 Earnings are expected to grow at 9 percent over the next year. a. What is the high target stock price in one year? Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the low target stock price in one year? Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
The fitted regression is Sales = 920 - 27.5 Price. (0-1) If Price = 1, what is the prediction for Sales? (Round your answer to 1 decimal place.) Sales (a-2) Choose the correct statement. A decrease in price decreases sales. O An increase in price increases sales. O An increase in price decreases sales. (b) If Price = 23, what is the prediction for Sales? (Round your answer to the nearest whole number.) Sales (c) Choose the right option. The intercept is meaningful as sales will be maximized when price is zero. O The intercept is not meaningful as a zero price is both unrealistic and unobserved.
You are reviewing a five-year monthly return regression of returns for Jamesway Corp, a U.S.-based consumer product company, against the S&P 500. 0.8 ReturnJamesway = 0.25% + 0.80*ReturnS&P 500 (R2 = 25%). The U.S. treasury bond rate is currently 4.75%, the treasury bill rate today is 4.25% and the historical equity risk premium is 4.91%. b. Based upon this regression, estimate the long-term cost of equity in $ currency terms for this company. a. 9.66% b. 7.48% c. 8.68% d. 10.25%
Your current portfolio is 100% invested in the market. You are considering investing some of your money in a portfolio run by Big Alpha Asset Management (BAAM). BAAM's returns have been quite good over the last five years. In order to understand by how much you could improve the Sharpe Ratio of your current portfolio by putting some of your money in BAAM, you run the following regression using past annualized returns on both the market and BAAM: RBAAM, Rft = a₁ + Bi (RM₁t - Rft) + €₁,t You estimate the following coefficients, which are all statistically significant: a=0.09; 3= 1.2 Additionally, you estimate the volatility of the residuals from the cove regression (idiosyncratic volatility) to be 0.14. In that same period the market's annualized volatility was 0.2078. Additionally, you expect the market's excess return to be 0.05 over the coming year. If you believe that the above estimates are representative of what will happen in the coming year, what is the maximum Sharpe Ratio you…
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