a. Use the data given to calculate annual returns for Granger, Lawlor, and the Market Index, and then calculate average returns over the five-year period

Data as given in the problem are shown below:

Granger Industries

Lawlor Incorporated

Market Index

Year

Stock Price

Dividend

Stock Price

Dividend

Includes Divs.

2018

$26.88

$1.74

$74.13

$4.51

17,496.97

2017

$23.13

$1.60

$79.45

$4.36

13,179.55

2016

$25.75

$1.51

$74.13

$4.14

13,020.97

2015

$17.13

$1.44

$86.88

$3.76

9,652.05

2014

$18.06

$1.36

$91.00

$3.39

8,404.42

2013

$12.44

$1.29

$84.63

$3.01

7,059.96

Calculate the rates of return for the two companies and the index:

b. Calculate the standard deviation of the returns for Granger, Lawlor, and the Market Index. Comment on what these standard deviations tell us.

c. Construct a scatter diagram graph that shows Grangers and Lawlors returns on the vertical axis and the Market Indexs returns on the horizontal axis.

d. Estimate Grangers and Lawlors betas as the slopes of regression lines with stock returns on the vertical axis (y-axis) and market return on the horizontal axis (x-axis. Are these betas consistent with your graph?

e. The risk-free rate on long-term Treasury bonds is 6.06%. Assume that the market risk premium is 5.01%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. Be sure to comment on what these returns tell us?

f. If you formed a portfolio that consisted of 60% Granger stock and 40% Lawlor stock, what would be its beta and its required return?

g. Suppose an investor wants to include Granger Industries stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.739, 0.905, and 1.523, respectively. Calculate the new portfolios required return if it consists of 35% of Granger, 15% of Stock A, 30% of Stock B, and 20% of Stock C.