(1) (11) (III) Your manager has asked you (i) to compute the rate of return and standard deviation of the two stocks and suggest that because these companies produce similar products, you should continue your analysis by (ii) computing their covariance and correlation. Show all calculations. Year 2019 2020 2021 2022 2023 Closing prices of LuLu 20.50 19.92 22.45 24.50 20.50 Closing prices of Lemon 30.10 28.50 30.10 40.30 36.40 Compute the return and standard deviation of a portfolio with 60% investment in Lulu and 40% in Lemon. Would you recommend putting these two stocks together in a portfolio? Explain why or why not.

(1) (11) (III) Your manager has asked you (i) to compute the rate of return and standard deviation of the two stocks and suggest that because these companies produce similar products, you should continue your analysis by (ii) computing their covariance and correlation. Show all calculations. Year 2019 2020 2021 2022 2023 Closing prices of LuLu 20.50 19.92 22.45 24.50 20.50 Closing prices of Lemon 30.10 28.50 30.10 40.30 36.40 Compute the return and standard deviation of a portfolio with 60% investment in Lulu and 40% in Lemon. Would you recommend putting these two stocks together in a portfolio? Explain why or why not.

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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5. Which of the following statements about event studies is/are true? (a) Event time is measured relative to the date on which the event (e.g. the stock split) is first announced to the market. (b) CAAR stands for Cumulative Average Abnormal Return. (c) Abnormal returns are always measured as the return over and above the Capital Asset Pricing Model. * (a) only. (b) only. (c) only. (a) and (b) only. (a) and (c) only. (a), (b) and (c).
Suppose you a stock analyst are performing a ratio analysis and comparing a discount merchdiser with a high end merchandiser. Suppose further that both companies have identical ROE. IF You apply the dupont equation to both firms, would you expect the three components to be the same for both companies? If not, explain what balance balance sheet and income statements might lead to the differences in the Dupont equation components.
d. Interpret your results in (c) above, assuming that the historical average return of 8.5% from the stock is a good benchmark. e. Critically evaluate the strengths and weaknesses of applying the implied rate of return from the RIVM as a proxy of the expected return.
Exercises: a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is: b. Explain the differences between systemic risk and unsystematic risk, give additional examples c. Compare and contrast the Capital Market Line and Security Market Line d. The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market? e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%
Which of the following is (are) correct regarding average returns? A The geometric mean is a better measure of an investor's effective return over several periods than the arithmetic mean. B The arithmetic mean is the average return for a series of returns and will always be less than or equal to the geometric mean. C Both a and b. D Neither a nor b.
Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Using the data generated in the previous question (Question 1);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 doesit show? Identify undervalued/overvalued investments from the graph Please answer A, B, C & D
Suppose you, a stock analyst, are performing a ratio analysis and comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies have identical ROEs. If you apply the DuPont equation to both firms, would you expect the three components to be the same for both companies? If not, explain what balance sheet and income statement items might lead to the differences in the DuPont equation components.
(c) Consider information given in the table below and answers the question asked thereafter: i. Calculate expected return on each stock? On the basis of this measure, which stock you will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of this measure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of this measure, which stock you will choose?iv. Calculate covariance and coefficient of correlation between the returns of the stocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio. (d) Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate…
Using the following data for Jackson Products Company, answer Parts a through g: Evaluate the liquidity position of Jackson relative to that of the average firm in theindustry. Consider the current ratio, the quick ratio, and the net working capital (currentassets minus current liabilities) for Jackson. What problems, if any, are suggested by thisanalysis?b) Evaluate Jackson’s performance by looking at key asset management ratios. Are anyproblem apparent from this analysis?c) Evaluate the financial risk of Jackson by examining its times interest earned ratio and itsequity multiplier ratio relative to the same industry average ratios.d) Evaluate the profitability of Jackson relative to that of the average firm in its industry,.e) Give an overall evaluation of the performance of Jackson relative to other firms in itsindustry.f) Perform a DuPont analysis for Jackson. What areas appear to have the greatest need forimprovement?g) Jackson’s current P/E ratio is 7 times. What factor(s) are…
You are a portfolio manager. John Smith, one of your clients, by providing you the following formation requested you to calculate standard deviation of Shah Corporation stock and High Fly Corporation. Based on the given information, what is the standard deviation of the returns on i) Shah Corporation and ii) High Fly Corporation? Which stock has higher standard deviation? Why? Please provide your reasoning. Please show all the calculations by which you came up with the final answer.
1. Which of the following models for mathematics of the financial markets is dependent on expectations or probabilities of changes in the value of an underlying asset? A. Monte Carlo Simulation B. Black Scholes Model C. Cox-Ross-Rubinstein Model 2. Models for the financial markets are primarily used for all of the following, except, A. Algorithmic Trading B. Technical Analysis (Short term trading) C. Fundamental Analysis (Long term investing D. All of the above 3. Which among the following organizations use financial mathematics as part of their core operation? A. Investment banks B. Government C. Hedge funds D. All of the above 4. S1: Quantitative finance helps to allocate resources to provide the optimum returns. S2: Financial models are accurate. A. Both statements are true B. Both statements are false C.…
Which of the following statements is CORRECT? a. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. b. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. c. If investors become less risk averse, the slope of the Security Market Line will increase. d. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. e. The slope of the SML is determined by the value of beta.

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