Suppose, you have just begun working for an investment firm called Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking to you about the firm's investment portfolio. As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. The company currently holds positions in stocks of Tesla, Inc. (TSLA) and Target Inc. (TGT).

Covili and Wyatt currently use a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked you to do the following assignments.

Questions:

1. Using monthly data for the last 73 months estimate the average monthly returns and standard deviations for TSLA, WMT, Three-month Treasury Bill, and S&P 500 (25 points)
2. Use the market model to estimate the beta for each of the two stocks (TSL and TGT) using the last 72 months' risk premiums. Then, estimate the annual required return for each stock based on CAPM using the estimated betas, the average market risk premium and the average risk free rate. (15 points)
3. If you choose to invest 30% of the funds on TSLA and the remaining 70% on TGT, what will be the beta and expected return on your portfolio?

Answer rating: 100% (QA)

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