Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, nd then calculate average returns over the five-year period. (Hint: Remember, returns are alculated by subtracting the beginning price from the ending price to get the capital gain or ss, adding the dividend to the capital gain or loss, and dividing the result by the beginning rice. Assume that dividends are already included in the index. Also, you cannot calculate the te of return for 2014 because you do not have 2013 data.) ata as given in the problem are shown below: Goodman Industries Stock Price $25.88 $22.13 $24.75 $16.13 Year 2019 2018 2017 2016 2015 2014 2019 2018 דורת Dividend $1.73 $1.59 $17.06 $11.44 le now calculate the rates of return for the two companies and the index: Goodman $1.50 $1.43 $1.35 $1.28 Landry Incorporated Stock Price $73.13 $78.45 $73.13 $85.88 $90.00 $83.63 Landry Index Market Index Dividend Includes Divs. $4.50 17,495.97 $4.35 13.178.55 $4.13 13,019.97 $3.75 9.651.05 $3.38 8,403.42 $3.00 7,058.96 b. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.) Since this is not a weighted average, use the function wizard to calculate the standard deviations. Standard deviation of returns c. Construct a scatter diagram graph that shows Goodman's and Landry' returns on the vertical axis and the Market Index's returns on the horizontal axis. It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we reformat the returns data calculated above and show it just below. Year 0 0 Goodman Landry Index 0 0 0 Index Goodman 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Landry 0.0% 0.0% 0.0% 0.0% 0.0%
Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, nd then calculate average returns over the five-year period. (Hint: Remember, returns are alculated by subtracting the beginning price from the ending price to get the capital gain or ss, adding the dividend to the capital gain or loss, and dividing the result by the beginning rice. Assume that dividends are already included in the index. Also, you cannot calculate the te of return for 2014 because you do not have 2013 data.) ata as given in the problem are shown below: Goodman Industries Stock Price $25.88 $22.13 $24.75 $16.13 Year 2019 2018 2017 2016 2015 2014 2019 2018 דורת Dividend $1.73 $1.59 $17.06 $11.44 le now calculate the rates of return for the two companies and the index: Goodman $1.50 $1.43 $1.35 $1.28 Landry Incorporated Stock Price $73.13 $78.45 $73.13 $85.88 $90.00 $83.63 Landry Index Market Index Dividend Includes Divs. $4.50 17,495.97 $4.35 13.178.55 $4.13 13,019.97 $3.75 9.651.05 $3.38 8,403.42 $3.00 7,058.96 b. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.) Since this is not a weighted average, use the function wizard to calculate the standard deviations. Standard deviation of returns c. Construct a scatter diagram graph that shows Goodman's and Landry' returns on the vertical axis and the Market Index's returns on the horizontal axis. It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we reformat the returns data calculated above and show it just below. Year 0 0 Goodman Landry Index 0 0 0 Index Goodman 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Landry 0.0% 0.0% 0.0% 0.0% 0.0%
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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Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Question
Concepts of Risk. In broad terms, why is some risk diversifiable? Why are some risks non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
Transcribed Image Text:a. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index,
and then calculate average returns over the five-year period. (Hint: Remember, returns are
calculated by subtracting the beginning price from the ending price to get the capital gain or
loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning
price. Assume that dividends are already included in the index. Also, you cannot calculate the
rate of return for 2014 because you do not have 2013 data.)
Data as given in the problem are shown below:
Goodman Industries
Year
2019
2018
2017
2016
2015
2014
2019
2018
2017
2016
2015
Stock Price
$25.88
$22.13
$24.75
Average
$16.13
$17.06
$11.44
We now calculate the rates of return for the two companies and the index:
Dividend
$1.73
$1.59
$1.50
$1.43
$1.35
$1.28
Goodman
Landry Incorporated
Stock Price
$73.13
$78.45
$73.13
$85.88
$90.00
$83.63
Landry
Index
Market Index
Dividend Includes Divs.
$4.50 17,495.97
$4.35 13,178.55
$4.13 13,019.97
$3.75 9,651.05
$3.38 8,403.42
$3.00 7,058.96
b. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation
formula given in the chapter, which corresponds to the STDEV function in Excel.)
Since this is not a weighted average, use the function wizard to calculate the standard deviations.
Standard deviation of returns
c. Construct a scatter diagram graph that shows Goodman's and Landry' returns on the vertical axis and the Market Index's returns on the
horizontal axis.
Goodman Landry Index
It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we reformat the returns data calculated
above and show it just below.
Year
0
0
0
0
0
Index Goodman
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Landry
0.0%
0.0%
0.0%
0.0%
0.0%
Transcribed Image Text:d. Estimate Goodman's and Landry's betas as the slopes of regression lines with stock returns
on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: use Excel's
SLOPE function.) Are these betas consistent with your graph?
Goodman's beta =
Landry' beta =
e. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%.
What is the expected return on the market? Now use the SML equation to calculate the two companies'
required returns.
Market risk premium (RPM) =
Risk-free rate =
Expected return on market =
Goodman:
Required return
Landry:
Required return
5.000%
6.040%
=
=
f. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?
Portfolio beta =
g. Suppose an investor wants to include Goodman Industries' stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio,
and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Goodman, 15% of
Stock A, 40% of Stock B, and 20% of Stock C.
Required return on portfolio:
Goodman
Stock A
Stock B
Stock C
Beta rtfolio Weight
25%
15%
40%
20%
100%
0.769
0.985
1.423
Portfolio Beta =
=
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