You become interested in AT&T. Download the file PS4 from canvas. It contains monthly market returns (from CRSP) and monthly risk-free returns (from Fama and French).

a. What is the AT&T beta? To find the beta calculate monthly excess returns for the market and AT&T using the risk-free rate, calculate the covariance of excess returns on the market with excess returns on AT&T stock, and divide by the variance of the excess return on the market. You can use the Excel functions=VAR(A1:A10)and=COVAR(A1:A10,B1:B10).

b. What is the historical AT&T alpha? Calculate the average excess return on AT&T and subtract the average excess return on the market multiplied by the AT&T beta. This is the monthly alpha over the sample period. Multiply by 12 to find the annualized alpha. Did AT&T do better or worse than predicted by the SML?

c. Plot the monthly excess returns and the SCL. Indicate alpha and beta in the graph.

d. You determine that over thenext year: E[rM]=7% and rf=2%. What is the risk premium of the market? If AT&T is priced according to the SML, what is the expected return of AT&T?

e. Draw the SML, indicating the market portfolio and AT&T. What is the slope of the SML?

f. After careful independent analysis you determine that, actually, E[rAT&T]=6.5% over the next year. Given your analysis, what is the current alpha of AT&T stock? According to your analysis is AT&T stock over- or under-priced?

g. News reaches the market that investors are more worried about the future and that, as a result, the market risk premium has increased. What are the effects on the AT&T expected rate of return? How will the AT&T stock price react?

Answer rating: 100% (QA)

Since I cant directly access external files or generate Excel functions Ill guide you through the st... View the full answer