Evaluating risk and return Bartman Industries and Reynolds Inc.s stock prices and dividends, along with the Winslow

Question:

Evaluating risk and return Bartman Industries’ and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2000–2005. The Winslow 5000 data are adjusted to include dividends.

BARTMAN INDUSTRIES REYNOLDS INC. Stock Price Dividend WINSLOW 5000 Includes Dividends 11,663.98 8,785.70 8,679.98 6,434.

a. Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index, and then calculate each entity’s average return over the 5-year period.

b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, 8-3a, to this chapter, which corresponds to the STDEV function in Excel.)

c. Now calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000.

d. Construct a scatter diagram that shows Bartman’s and Reynolds’s returns on the vertical axis and the Winslow Index’s returns on the horizontal axis.

e. Estimate Bartman’s and Reynolds’s betas by running regressions of their returns against the index’s returns. Are these betas consistent with your graph?

f. Assume that the risk-free rate on long-term Treasury bonds is 6.04 percent. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market’s required return—it is too high, so use 11 percent as the expected return on the market. Now use the SML equation to calculate the two companies’ required returns.

g. If you formed a portfolio that consisted of 50 percent Bartman and 50 percent Reynolds, what would the beta and the required return be?

h. Suppose an investor wants to include Bartman Industries’ stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio’s required return if it consists of 25 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20 percent of Stock C.

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