(Using the CAPM to find expected returns) (Related to Checkpoint 8.3 on page 272)

a. Given the following holding-period returns, compute the average returns and the standard deviations for the Sugita Corporation and for the market portfolio.

Month Sugita Corp. Market 1 1.8% 1.5%

2 –0.5 1.0 3 2.0 0.0 4 –2.0 –2.0 5 5.0 4.0 6 5.0 3.0

b. If Sugita’s beta is 1.18 and the risk-free rate is 4 percent, what return would be expected by an investor owning Sugita? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable to the risk-free rate. For simplicity, you can convert from monthly returns to yearly returns by multiplying the average monthly returns by 12.)

c. How does Sugita’s historical average return compare with the return you should expect based on the CAPM and the firm’s systematic risk?