Air Canada and Loblows Finance Assingment Help With Solution
- a. If the expected rate of return on the market portfolio is 11% and the risk-free rate is 4%, find the beta for a portfolio which has an expected rate of return of 18%.
- What percentage of this portfolio must an individual put into the market portfolio in order to achieve an expected return of 18%?
- You have forecast the correlation coefficient between the rate of return on Beta Mutual Fund and the TSX at .8. Your forecast of the standard deviations of the rates of return are .25 for Beta MF, and .20 for the TSX. How would you combine the Beta MF and a riskless security to obtain a portfolio with a volatility (beta) of .8?
- What is the beta of an efficient portfolio with E(RP) = 15% if RF = 4%, E(RM) = 9%, and sM = 18%? What is its sP? What is its correlation with the market?
- Given the facts that the common stock of the Bio Tech Corporation has E(R)= 25%, s2R= 52%,
Beta =2 and E(RM)= 15%, s M = 20% and Rf= 5%. What is its unsystematic risk
6.What is the beta of each stock in the following table:
Expected stock return Expected stock return
Stock If Market return is –10% if Market return is +10%
A +15 +15
B +10 -10
7.Here some historical data on the risk characteristics of Air Canada and Loblows:
Air Canada Loblaws
Beta 0.8 .30
Average s % 14 9
Assume that s TSX = 17%.
- What is the standard deviation of a portfolio consisting of 1/3 in Air Canada, 1/3 in Loblaws and 1/3 in T-Bills?
- What is the approximate standard deviation of a portfolio composed of 1000 stocks with Beta’s
of . 8 like Air Canada? How about 1000 stocks like Loblaws?
8.The annual rates of return on the Retirement Income Portfolio for Officers (RIP-OFF), a leading pension fund for police officers and on the TSX Index for the past few years are as follows:
Year RIP-OFF(%) TSX (%)
19×2 18.2 11.4
19×3 14.2 10.1
19×4 8.7 9.3
19×5 -22.5 -12.1
19×6 0.6 2.1
19×7 79 35
- Compute the expected returns and the variances for RIP-OFF and TSX.
- Compute the beta of the RIP-OFF fund.
- What percentage of the variance of this fund’s returns is NOT explained by the TSX Index?
- Given your answer to (c), is the Single Index Model an appropriate model of portfolio returns?
- Assuming that the TSX is expected to yield only a 5% return next year, what should be your best forecast of the fund’s return next year using CAPM?
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- The Treasury bill rate is 5 percent and the market portfolio return is expected to be 13 percent.
- If the expected return on Joy Wish Corp. stock is 17 percent, what is its beta?
- If an investment with a beta of 1.8 were expected to give a return of 19 percent, would you accept it?
- ABC Corp. wishes to use 3-factor model to estimate its cost of equity capital. The company has estimated the following factor sensitivities and factor risk premiums:
|Factors||Factor loading||Factor price|
If the risk free rate is 6 percent, estimate the cost of equity capital for the firm.
- Your broker is urging you to invest in one of three portfolios on which the returns are expected to be as follows: portfolio A, 12 percent; portfolio B, 16 percent; portfolio C, 20 percent.
You believe these estimates, but you also have sufficient data to calculate the betas of the portfolios with confidence. You find the betas are 0.5 for A, 1.1 for B, and 2.0 for C.
Which portfolio is best and why? (Hint: See if you can duplicate portfolio B by some combination of A and C.)
- Stock J has a beta of 1.2 and an expected return of 15.6 percent, and stock K has a beta of 0.8 and an expected return of 12.4 percent.
What must be (a) the expected return on the market and (b) the risk-free rate of return, to be consistent with the capital asset pricing model?
- The return on a proposed investment in stock is expected to be 24 percent. The standard deviation is estimated at 24 percent. The risk free rate is 6 percent. Assume the expected market risk premium to be 9 percent. Assume that the standard deviation of market returns to be 15 percent. If the stock correlates fairly highly with the economy, comment on the attractiveness of the stock.
- Stock A has an expected return of 14 percent and a beta of 1.1. Stock B has an expected return
of 18. The risk free rate is 5.2 percent. Assume that stock A is correctly priced (i.e. it is on the security market line). If stock B has a beta of 1.4, is it correctly priced?
- Assume the following:
R1t = E(R1) + F1 +2 F2 + e1t
R2t = E(R2) + F1 + 3F2 + e2t
R3t = E(R3) + 3F1 + F2+ e3t
- What are the betas?
- Determine the common factor prices using equilibrium APT model where E(RZ) = 5%,
E(R1) = 19%, and E(R2) = 23%.
- What must be the expected return for stock 3 at the equilibrium level?
- Form a beta portfolio of the first 2 stocks that will be insensitive to factor 2, i.e. F2.
Returns -Securities and Market
Month A B C S&P
1 12.05 25.20 31.67 12.28
2 15.27 2.86 15.82 5.99
3 ‑4.12 5.45 10.58 2.41
4 1.57 4.56 ‑ 14.43 4.48
5 3.16 3.72 31.98 4.41
6 ‑ 2.79 10.79 ‑ 0.72 4.43
7 ‑ 8.97 5.38 ‑ 19.64 ‑ 6.77
8 ‑1.18 ‑2.97 ‑10.00 ‑2.11
9 1.07 1.52 ‑11.51 3.46
10 12.75 10.75 5.63 6.16
11 7.48 3.79 ‑ 4.67 2.47
12 ‑0.94 1.32 7.94 ‑1.15
Compute the return and standard deviation of a portfolio constructed by placing one‑third of your funds in each stock, using The single‑index model.
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