Question

3.It is possible to compute means, variances, betas, and so forth using historical data as shown in “Window 12.2: Calculating Beta”. For our purposes, the procedure is identical to the case of various economic states where each economic state is equally likely. Consider the following history of returns:

Year	Homer Company	Large Company Stocks
1	34.09%	40.16%
2	1.00%	2.03%
3	17.05%	12.41%
4	73.15%	27.26%
5	20.40%	-6.56%
6	51.84%	26.31%
7	30.50%	4.46%
8	2.22%	7.06%
9	11.43%	-1.54%
10	40.16%	34.11%

1. Compute the mean of each return series (Hint: Treat each outcome as having the same probability of recurring—in this case 10%).
2. Compute the beta of Homer Company (Hint: First compute the covariance between them and the variance of the market).

Answer 1