Question: You are provided with the following data on the return to the stock of XYZ Corporation (XYZ_R), return to market index (Market_R), and risk-free government
You are provided with the following data on the return to the stock of XYZ Corporation (XYZ_R), return to market index (Market_R), and risk-free government bond (Bond_R) for the past 10 years.
| XYZ_R | Market_R | Bond_R |
| 6 | 9 | 2 |
| 4.5 | 6.5 | 2.5 |
| 5 | 9 | 2 |
| 1 | 3 | 1 |
| 5.5 | 7.5 | 1.5 |
| 2.5 | 7.5 | 1.5 |
| 6 | 8 | 1 |
| 7 | 10 | 1 |
| 4.5 | 8.5 | 1.5 |
| 4 | 7 | 2 |
a. Estimate a CAPM regression of risk premium of XYZ Corporation to market risk premium.
b. Do a statistical analysis of the regression output. what is the beta value?
c. Draw the security market line (SML) and analyze XYZ Corporation as an investment opportunity.
d. The market risk premium for the next year is estimated to be 11%. Forecast XYZs risk premium for the next year and write a 95% confidence interval.
e. What is the expected rate of return on the XYZs stock for the next year.
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