Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 6, Problem 14SP
a.
Summary Introduction
To determine: The holding period return for each month.
b.
Summary Introduction
To determine: The average monthly returns and standard deviation for Company N and S&P I.
c.
Summary Introduction
To determine: The relationship between Company N and S&P I return using a graph.
d.
Summary Introduction
To determine: The nature of relationship between Company N’s stock and S&P I.
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The following are the end-of-month prices for both the Standard & Poor's 500 Index and Nike's common stock.
a. Using the data in the popup window, calculate the holding-period returns for each of the months.
b. Calculate the average monthly return and the standard deviation for both the S&P 500 and Nike.
c. Develop a graph that shows the relationship between the Nike stock returns and the S&P 500 Index. (Show the Nike returns on the vertical axis and the S&P 500 Index returns on the horizontal axis.)
d. From your graph, describe the nature of the relationship between Nike stock returns and the returns for the S&P 500 Index.
The following table represents the rate of returns of two stocks in different
economic conditions along with their probabilities (the data are also uploaded on
moodle)
RATES OF RETURN ON STOCKS
EXPECTED
ECONOMIC
PROBABILITY
STOCK A
STOCK B
CONDITIONS
RECESSION
0.55
-0.04
-0.02
STABLE
0.35
0.25
0.30
EXPANDING
0.10
0.15
0.20
Answer the following by using mathematical calculations:
a) Calculate the expected rate of return for each stock respectively. Explain
what the expected value implies.
b) Calculate the standard deviation for each stock respectively. Explain what
the standard deviation implies.
c) If you were an investor in which stock you were going to invest? Justify
your answer.
d) Calculate the covariance between Stock A and stock B. Discuss.
e) Calculate the expected return and the standard deviation of the portfolio
consisting 40% in stock A and 60% in stock B.
f) Discuss the risk and return associated with investing
i All of your funds in stock A
ii. All of your funds in stock…
In Capital IQ, find the monthly price data (Historical Price, HP) for stocks of Kellogg and IBM from January 2018 to December 2023. Compute the monthly returns, mean return, sample variance, sample standard deviation, sample covariance, and correlation statistics. Graph a monthly mean return and standard deviation frontier of the portfolios composed of these two stocks.
The data for Kellogg and IBM is given below. Please provide everything correct as needed with explanations.
Dates
Kellanova (NYSE:K) - Share Pricing
Jan-31-2018
68.11
Feb-28-2018
66.2
Mar-31-2018
65.01
Apr-30-2018
58.9
May-31-2018
64.39
Jun-30-2018
69.87
Jul-31-2018
71.03
Aug-31-2018
71.79
Sep-30-2018
70.02
Oct-31-2018
65.48
Nov-30-2018
63.65
Dec-31-2018
57.01
Jan-31-2019
59.01
Feb-28-2019
56.26
Mar-31-2019
57.38
Apr-30-2019
60.3
May-31-2019
52.56
Jun-30-2019
53.57
Jul-31-2019
58.22
Aug-31-2019…
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
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- Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."arrow_forwardAn analyst gathered the following information for a stock and market parameters: stock beta = 0.757; expected return on the Market = 11.65%; expected return on T-bills = 3.02%; current stock Price = $9.92; expected stock price in one year = $8.20; expected dividend payment next year = $2.92. Calculate the required return and expected return for this stock. Please write your answers as percentages (e.g. 1234 should be written as 12.34): A. Required Return: B. Expected Return: % %arrow_forwardhe table below shows information for 3 stocks. Security Beta Risk-free rate Expected market return Stock 1 1.9 0.02 0.09 Stock 2 1.2 0.035 0.09 Stock 3 0.2 0.015 0.09 The risk-free rates are different because they were measured in different years. Calculate the expected (or required) return for each stock, using the Capital Asset Pricing Model (CAPM). What is the required return for stock 1? What is the required return for stock 2? What is the required return for stock 3?arrow_forward
- a. Determine Stock X's beta coefficient. b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise, assume that the market return is equal to the NYSE's average return. Using the information calculated, what is the assumed risk-free rate in the CAPM equation? Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)arrow_forwardUsing the data in the chart, calculate the first-period rates of return on the following indexes of the three stocks: A market-value-weighted index. An equally weighted index. stocks P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 (Pt represents price at time t, and Qt represents shares outstanding at time t.)arrow_forwardSuppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 3.2% + 1.10RM + eA RB = -1.4 % + 1.25RM + eB OM= 30%; R-squareд = 0.28; R-squareg = 0.12 What is the covariance between each stock and the market index? Note: Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Do not round your intermediate calculations. Round your answers to nearest whole number. Answer is complete but not entirely correct. Stock A Stock B Covariance 93 x 101 xarrow_forward
- An analyst gathers the following data: * Expected (estimated) rate of return on the market = 15% * Risk Free Rate = 8% * Expected (estimated) rate of return on stock X = 17% * Stock X's beta = 1.75 Using these data and the capital asset pricing model, which of the following statements about X's stock is true? Stock X is: a. properly valued b. overvalued by 1.75% c. undervalued by 1.40% d. undervalued by 0.25%arrow_forwardConsider the three stocks in the following table. Pt represents price at time t, Qt represents shares outstanding at time t. Stock C splits two for one in the second period from t=1 to t=2. Calculate the rate of return on a price-weighted index consisting of the three stocks for the first period from t=0 to t=1. Answer in percentage. Stock P0 Q0 P1 Q1 P2 Q2 A 70 475 75 475 75 475 B 45 850 40 850 40 850 C 50 300 60 300 30 600 a. 0.00% b. 2.49% c. 6.06% d. 8.95% e. 1.30%arrow_forwardAn analyst gathered the following information for a stock and market parameters: . stock beta= 1.11; expected return on the Market - 9.55%; expected return on T-bills- 2.03%; . current stock Price = $5.62; . . . . expected stock price in one year $11.26; expected dividend payment next year = $2.29. - Calculate the required return for this stock. Please share your answer as a percentage rounded to 2 decimal places.arrow_forward
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