Question

You have collected returns on AnaDone, a large diversified manufacturing firm, and the NYSE index for five years:
a. Estimate the intercept (alpha) and slope (beta) of the regression.
b. If you bought stock in AnaDone today, how much would you expect to make as a return over the next year? (The sixmonth Treasure bill rate is 6%.)
c. Looking back over the past five years, how would you evaluate AnaDone’s performance relative to the market? (You can assume that the average risk free rate over the last 5 years was also 6%)
d. Assume now that you are an undiversified investor and that you have all of your money invested in AnaDone. What would be a good measure of the risk that you are taking on? How much of this risk would you be able to eliminate if you diversify?
e. AnaDone is planning to sell off one of its divisions.
The division under consideration has assets which comprise half of the book value of AnaDone and 20% of the market value. Its beta is twice the average beta for AnaDone (before divestment). What will the beta of AnaDone be after divesting this division?


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  • CreatedApril 15, 2015
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