Barry wishes to compute the beta of a stock that has a correlation of 0.64 with the market. The following data is available: Standard Deviation of Returns of Stock = 14.1%. Standard Deviation of Returns of Market = 9.44%. 1) Calculate the beta of the stock 2) If the risk free rate is estimated to be 3%, market return 9% and given the beta that you calculated in question 1, what is the expected return of the stock? 3) If the actual return next year turned out to be 10% what is the Jensen's alpha? Is Barry, the investor happy or disappointed? 4) Using data for the stock presented and/or calculated above, what is the Sharpe ratio? When is this measurement appropriate? 5) Using data for the stock presented and/or calculated above, what is Treynor measure? When is this measurement appropriate?
Barry wishes to compute the beta of a stock that has a correlation of 0.64 with the market. The following data is available: Standard Deviation of Returns of Stock = 14.1%. Standard Deviation of Returns of Market = 9.44%. 1) Calculate the beta of the stock 2) If the risk free rate is estimated to be 3%, market return 9% and given the beta that you calculated in question 1, what is the expected return of the stock? 3) If the actual return next year turned out to be 10% what is the Jensen's alpha? Is Barry, the investor happy or disappointed? 4) Using data for the stock presented and/or calculated above, what is the Sharpe ratio? When is this measurement appropriate? 5) Using data for the stock presented and/or calculated above, what is Treynor measure? When is this measurement appropriate?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 1P
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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.
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