Question

# Answer the following unrelated questions (a&b) regarding risk and return: A) Based on the following data,...

1. Answer the following unrelated questions (a&b) regarding risk and return:

A) Based on the following data, compute the Beta for Zebra Corp.:

Month                     Market Return(%)             Zebra Corp Return(%)

1                                       2.0                                   1.6

2                                       2.0                                   2.0

3                                       2.0                                   5.4

4                                       -2.0                                   -5.4

5                                       -2.0                                   -1.6

6                                       -2.0                                   -2.0

1. The CAPM (Capital Asset Pricing Model) is often used to evaluate the performance of professional money management. Suppose that Fraudulent Mutual Fund has a 12-year average annual return of 20%, with a beta of 2.2. The S&P 500 (market) index grew 14% per year over the same period, and the average Treasury Bill (risk-free) yield was 4%. The manager of the fund claims that the reason to buy his fund is that it has beaten the market by a margin of 6% per year. Evaluate the manager’s claim, and should buy the fund? (Hint: Do you believe that the mutual fund has outperformed the market if the CAPM is valid to represent the risk-return relationship, i.e. what return would you expect from this fund given its level of riskiness?)

(a) Calculation of beta for Zebra Corp :

 Market Return (X) Zebra Corp Return (Y) XY Y2 2 1.6 3.20 2.56 2 2.0 4 4 2 5.4 10.80 29.16 -2 -5.4 10.80 29.16 -2 -1.6 3.20 2.56 -2 -2.0 4 4 =0 =0 =36 =71.44

= / n

= 0/6

= 0

= / n

= 0 / 6

= 0

= ( - n**) / ( - n*2)

= (36 - 6*0*0) / (71.44 - 6*0)

= 0.5039

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