Question

- 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

- 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

nswer 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
3.0
2.6
2
3.0
3.0
3
3.0
6.4
4
-3.0
-6.4
5
-3.0
-2.6
6
-3.0
-3.0
b. 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...

A mutual fund has earned an annual average return of 15% over
the last 5 years. During that time, the average risk-free rate was
2% and the average market return was 12% per year. The correlation
coefficient between the mutual fund’s and market’s returns was 0.7.
The standard deviation of returns was 45% for the mutual fund and
22% for the market. What was the fund’s CAPM alpha?

A mutual fund has earned an annual average return of 15% over
the last 5 years. During that time, the average risk-free rate was
2% and the average market return was 12% per year. The correlation
coefficient between the mutual fund’s and market’s returns was 0.7.
The standard deviation of returns was 45% for the mutual fund and
22% for the market. What was the fund’s CAPM alpha?

A mutual fund has earned an annual average return of 15% over
the last 5 years. During that time, the average risk-free rate was
2% and the average market return was 12% per year. The correlation
coefficient between the mutual fund’s and market’s returns was 0.7.
The standard deviation of returns was 30% for the mutual fund and
22% for the market. What was the fund’s CAPM alpha?

CAPM, PORTFOLIO RISK, AND RETURN
Consider the following information for stocks A, B, and C. The
returns on the three stocks are positively correlated, but they are
not perfectly correlated. (That is, each of the correlation
coefficients is between 0 and 1.)
Stock
Expected Return
Standard Deviation
Beta
A
9.00%
16%
0.8
B
11.00
16
1.2
C
13.00
16
1.6
Fund P has one-third of its funds invested in each of the three
stocks. The risk-free rate is 5%, and...

A mutual fund has earned an annual average return of 15% over
the last 5 years. During that time, the average risk-free rate was
2% and the average market return was 12% per year. The correlation
coefficient between the mutual fund’s and market’s returns was 0.7.
The standard deviation of returns was 50% for the mutual fund and
22% for the market. What was the fund’s CAPM alpha?
a) -2.9%
b) -1.3%
c) 0.3%
d) 1.9%
e) 3.5%

CAPM, PORTFOLIO RISK, AND RETURN
Consider the following information for stocks A, B, and C. The
returns on the three stocks are positively correlated, but they are
not perfectly correlated. (That is, each of the correlation
coefficients is between 0 and 1.)
Stock
Expected
Return
Standard
Deviation
Beta
A
9.18%
15%
0.8
B
11.02
15
1.2
C
13.32
15
1.7
Fund P has one-third of its funds invested in each of the three
stocks. The risk-free rate is 5.5%, and...

CAPM, PORTFOLIO RISK, AND RETURN Consider the following
information for stocks A, B, and C. The returns on the three stocks
are positively correlated, but they are not perfectly correlated.
(That is, each of the correlation coefficients is between 0 and 1.)
Stock=A, B, C. Expected Return=9.15 ,11.40, 13.65 Standard
deviation:14%, 14, 14 Beta: 0.7, 1.2, 1.7 Fund P has one-third of
its funds invested in each of the three stocks. The risk-free rate
is 6%, and the market is...

Answer the following CAPM questions in Excel. Show your work
Assume that Blast Company has a Beta of 0.85, the Risk Free Rate
is 2.0% and the Expected Market Return is 6.75%.
i. What is the Required Rate of Return for Blast Company?
ii. Now assume that the Risk Free Rate is the same, but the
Market Return is 7.5%. What is the Required Rate of Return for
Blast Company now?

Consider the following information:
Portfolio
Expected Return
Beta
Risk-free
12
%
0
Market
13.8
1.0
A
11.8
0.9
a. Calculate the expected return of portfolio
A with a beta of 0.9. (Round your answer to 2
decimal places.)
Expected return
%
b. What is the alpha of portfolio A.
(Negative value should be indicated by a minus
sign. Round your answer to 2 decimal
places.)
Alpha
%
c. If the simple CAPM is valid, is the above
situation possible?
Yes...

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