FIN 640 Week 3 Assignment

Chapter 6, Problem 1: Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk).

ARit = Rit – Rmt

Stock B11.5% – 4.0% = 7.5%

Stock F10.0% – 8.5% = 1.5%

Stock T14.0% – 9.6% = 4.4%

Stock C12.0% – 15.3% = (3.3%)

Stock E15.9% – 12.4% = 3.5%

Chapter 6, Problem 2: Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following systematic risk measures (betas).

ARit = Rit – (beta)Rmt

Stock B11.5% – (.95)4.0% = 7.7%

Stock F10.0% – (1.25)8.5% = (0.63%)

Stock T14.0% – (1.45)9.6% = 0.08%

Stock C12.0% – (0.70)15.3% = (0.53%)

Stock E15.9% – (-0.30)12.4% = 19.62%

Chapter 7, Problem 1: Compute the expected rate of return E(Ri) for Lauren Labs.

0.10*-0.20 = -0.02

0.15*-0.05 = -0.1

0.20*0.10 = 0.02

0.25*0.15 = 0.0375

0.20 *0.20 = 0.04

0.10*0.40 = 0.04

-0.02 – 0.1 + 0.02 + 0.0375 + 0.04 + 0.04 = 0.0175 or 1.75% expected rate of return.

Chapter 7, Problem 2: What is the expected rate of return for your common stock portfolio?

$15,000 + $17,000 + $32,000 + $23,000 + $7,000 = $94,000 total portfolio value

StockMarket ValueWeight of Stock

Disney$15,0000.1596

Starbucks$17,0000.1809

Harley Davidson$32,0000.3404

Intel$23,0000.2447

Walgreens$7,0000.0744

StockMarket ValueWeightERRWeighted ERR

Disney$15,0000.15960.140.0223

Starbucks$17,0000.1809-0.04-0.0072

H-D$32,0000.34040.180.0612

Intel$23,0000.24470.160.0392

Walgreens$7,0000.07440.120.0089

0.0223 – 0.0072 + 0.0612 + 0.0392 + 0.0089 = 0.1244 or 12.44% total expected rate of return of the common stock portfolio.