Being a conservative investor, you are able to obtain returns data for two stocks of interest for
Question:
Being a conservative investor, you are able to obtain returns data for two stocks of interest for the years 2015 through to 2021. The data is summarised below:
Year | AEL Ltd | BDL Ltd |
2015 | 8% | 11% |
2016 | 9% | 13% |
2017 | 13% | 9% |
2018 | 10% | 10% |
2019 | 14% | 8% |
2020 | 20% | 8% |
2021 | 12% | 9% |
Create a table similar to the table above to answer the following:
a. Calculate standard deviation of the holding period return for all stocks. 6 marks.
b. Calculate annual holding period returns for the two stocks. 4 marks.
c. Plot the data from the table above on a graph that has risk (x-axis) and return (y-axis) . 5 marks.
d. Calculate the covariance between AEL and BDL. 5 marks.
e. Calculate the correlation coefficients between AEL and BDL. What can you conclude? 4 marks.
f. If you construct a portfolio where 40% of funds are invested in AEL and the rest in BDL what would be the expected return and standard deviation of this two-asset portfolio? 6 marks
g. If the relevant government bond rate in 2021 was 1.3%, beta of AEL is 1.2 while BDL has a beta of 0.7, calculate the expected return of stocks AEL and BDL according to the CAPM assuming the market return of 8%. 5 marks.
h. Comparing your answers from part b.) and part g.) identify and explain if the stocks were fairly priced or not in 2021. (maximum 100 words) 5 marks.
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt , Eugene F. Brigham