Question

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

2. 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?)

Answer 1

(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