MGMT 136 - Assignment 1 - Fall, 1996



MGMT 136 - Assignment 6 – Fall, 2002

1. The following information was generated using 1991 - 2000 data:

Standard deviation of Charles Schwab .89

Standard deviation of Campbell Soup .26

Correlation coefficient between Charles Schwab and the Market .54

Correlation coefficient between Campbell Soup and the Market .57

Mean return on the Market (S&P 500) .18

Variance of returns on the Market .023

Risk-free rate of return (T-Bills) .04

a) What is the beta coefficient of Charles Schwab?

b) What is the beta coefficient of Campbell Soup?

c) What is the beta coefficient of a portfolio consisting of 25 percent invested in Charles Schwab and 75 percent invested in Campbell Soup?

d) According to the Capital Asset Pricing Model, how would you rank these stocks according to risk?

e) According to the CAPM, compute the equilibrium rate of return for:

1. Charles Schwab

2. Campbell Soup

3. The portfolio in part (c) above.

f) Plot the Security Market Line and indicate the positions of Charles Schwab, Campbell Soup and the portfolio in part (c) above.

2. Suppose that the relevant equilibrium model is the CAPM with unlimited borrowing and lending at a riskless rate of interest. Complete the blanks in the following table:

Security Expected Return Standard Deviation Beta Residual Variance

A .08 .10 ____ 0

B .12 ________ 2 .49

C _______ ________ 1 0

D .05 ________ 0 .36

3. Refer to the following diagram:

[pic]

a) What are the beta coefficients of stocks A, B, and C?

b) What are the residual variances of stocks A, B, and C?

c) Consider a portfolio consisting of 20 percent invested in stock A, and 80 percent invested in stock C.

1. What is the beta coefficient of the portfolio?

2. According to the CAPM, what should the portfolio’s equilibrium return be?

d) Evaluate the following statement: “Stocks B and C should be viewed as equally risky because they have the same standard deviation.”

4. Using the Single Factor Model program, the following information was generated using annual returns during the period, 1991 - 2000. (Note: You do not have to use the computer for this problem).

|Stock |Mean Return (%) |Beta |

|Adolph Coors |21.6 |0.62 |

|Anheuser Busch |20.2 |0.61 |

|Campbell Soup |14.6 |0.96 |

|Charles Schwab |76.7 |3.09 |

|Exxon Mobil |13.8 |0.62 |

|General Electric |27.6 |1.20 |

|General Mills |10.7 |0.24 |

|Home Depot |43.5 |2.18 |

|IBM |17.8 |1.14 |

|Intel |44.7 |1.28 |

|Johnson & Johnson |23.5 |1.00 |

|McGraw Hill |20.9 |1.01 |

|Merck & Co. |27.7 |1.17 |

|Microsoft |49.1 |2.59 |

|Nike |28.8 |0.56 |

|Pepsico |16.3 |0.31 |

|Safeway |43.3 |0.20 |

|Sears Roebuck |21.8 |0.40 |

|Walmart |30.7 |2.19 |

|Walt Disney |15.4 |0.28 |

The mean return on the market (S&P 500)was 18.4%. Assume the risk-free rate (T-Bills) is 5.0%.

a) Rank order the beta coefficients. Assume you form two portfolios. Portfolio #1 contains the 10 securities with the smallest beta coefficients. Assume equal weights for all stocks. Portfolio #2 contains the 10 securities with the largest beta coefficients. Again, assume equal weights for the stocks.

b) Compute the mean returns and betas of the two portfolios formed in part (a).

c) Plot mean return against beta including data points for each of the 20 securities, the risk-free rate, the market index, and the two portfolios from part (a) above. Draw in the Security Market Line as indicated by the market and the risk-free rate.

d) Can you conclude from the graph in part (c) above that the market index is an efficient market portfolio?

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