Chapter 9, Problem 11PS

Measuring risk* The following table shows estimates of the risk of two well-known Canadian stocks:

1. a. What proportion of each stock’s risk was market risk, and what proportion was specific risk?
2. b. What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
3. c. What is the confidence interval on Loblaw’s beta? (See page 234 for a definition of “confidence interval.”)
4. d. If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 5% and an expected market return of 12%.
5. e. Suppose that next year, the market provides a 20% return. Knowing this, what return would you expect from Sun Life?