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The required rate of returns you need in calculating your SML this week is the same required rate

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The required rate of returns you need in calculating your SML this week is the same required rate of return on your portfolio in week 4. Based on section 8.3 in your textbook, rm is your required rate of return on your portfolio. This will be the required rate of return you calculated using your week 4 excel and that is what you needed to use in your calculations for all of your four stocks. For example, if the required rate of return on your portfolio from week 4 is 25% and the risk free rate is 3% (given). Then the risk premium on all your 4 stocks = 25 ? 3 = 22. This will be the same for all of your 4 stocks.;The formula you need to use for your SML is 8-8 on page 273 of your textbook. SML Equation;ri = rRF + (RPm) bi;***********************************************************************;Standard Deviation Calculation based on;Monthly closing price from Jan 2010 - July 2014;Stocks;St. Dev 5.2678 8.3001 192.5300 17.3650;MSFT YHOO GOOGL FB;$ 44.83 $ 33.60 $ 603.57 $ 69.27;$ 41.70 $ 35.13 $ 584.67 $ 67.29;$ 40.94 $ 34.65 $ 571.65 $ 63.30;$ 40.40 $ 35.95 $ 534.88 $ 59.78;$ 40.99 $ 35.90 $ 1,114.51 $ 60.24;$ 38.31 $ 38.67 $ 1,215.65 $ 68.46;$ 37.84 $ 36.01 $ 1,180.97 $ 62.57;$ 37.41 $ 40.44 $ 1,120.71 $ 54.65;$ 38.13 $ 36.98 $ 1,059.59 $ 47.01;$ 35.41 $ 32.94 $ 1,030.58 $ 50.21;$ 33.28 $ 33.17 $ 875.91 $ 50.23;$ 33.40 $ 27.12 $ 846.90 $ 41.29;$ 31.84 $ 28.09 $ 887.75 $ 36.80;$ 34.54 $ 25.13 $ 880.37 $ 24.88;$ 34.90 $ 26.30 $ 871.22 $ 24.35;$ 33.10 $ 24.73 $ 824.57 $ 27.77;$ 28.61 $ 23.53 $ 794.19 $ 25.58;$ 27.80 $ 21.31 $ 801.20 $ 27.25;$ 27.45 $ 19.63 $ 755.69 $ 30.98;$ 26.71 $ 19.90 $ 707.38 $ 26.62;$ 26.62 $ 18.77 $ 698.37 $ 28.00;$ 28.54 $ 16.84 $ 680.30 $ 21.11;$ 29.76 $ 15.98 $ 754.50 $ 21.66;$ 30.82 $ 14.65 $ 685.09 $ 18.06;$ 29.47 $ 15.84 $ 632.97 $ 21.71;$ 30.59 $ 15.83 $ 580.07 $ 31.10;$ 29.19 $ 15.24 $ 580.86 $ 29.60;$ 32.02 $ 15.54 $ 604.85;$ 32.26 $ 15.22 $ 641.24;$ 31.74 $ 14.83 $ 618.25;$ 29.53 $ 15.47 $ 580.11;$ 25.96 $ 16.13 $ 645.90;$ 25.58 $ 15.71 $ 599.39;$ 26.63 $ 15.64 $ 592.64;$ 24.89 $ 13.17 $ 515.04;$ 26.60 $ 13.61 $ 540.96;$ 27.40 $ 13.10 $ 603.69;$ 26.00 $ 15.04 $ 506.38;$ 25.01 $ 16.55 $ 529.02;$ 25.92 $ 17.70 $ 544.10;$ 25.39 $ 16.68 $ 586.76;$ 26.58 $ 16.40 $ 613.40;$ 27.73 $ 16.12 $ 600.36;$ 27.91 $ 16.63 $ 593.97;$ 25.26 $ 15.82 $ 555.71;$ 26.67 $ 16.49 $ 613.70;$ 24.49 $ 14.17 $ 525.79;$ 23.47 $ 13.11 $ 450.02;$ 25.81 $ 13.88 $ 484.85;$ 23.01 $ 13.84 $ 444.95;$ 25.80 $ 15.34 $ 485.63;$ 30.54 $ 16.53 $ 525.70;$ 29.29 $ 16.53 $ 567.12;$ 28.67 $ 15.31 $ 526.80;$ 28.18 $ 15.01 $ 529.94;Company Name Ticker Symbol Percentage Beta of Stock St. Deviation;Microsoft Corporation MSFT 15% 0.68 5.2678;Yahoo! Inc. YHOO 30% 1.07 8.3001;Google Inc. GOOGL 35% 0.93 192.53;Facebook, Inc. FB 20% 1.08 17.355;MSFT: Beta of 0.68 implies that this stock is less volatile than the market, hence poses less risk.;YHOO: Beta of 1.07 implies that this stock is more volatile than the market, hence poses high risk.;GOOGL: Beta of 0.93 implies that this stock is less volatile than the market, hence poses less risk.;FB: Beta of 1.08 implies that this stock is more volatile than the market, hence poses high risk.;Based on beta of stocks in our portfolio, we can arrange these stocks from riskier to less risky as follows;FB ? YHOO? GOOGL? MSFT;Beta of Portfolio = 0.15*0.68 + 0.30*1.07 + 0.35*0.93 +0.20*1.08;0.9645;Beta of 0.9645 implies that our portfolio is less volatile than the market, hence poses less risk.;Based on beta of stocks, we choose to invest heavily in Microsoft Corporation as it has lowest beta.

 

Paper#30778 | Written in 18-Jul-2015

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