Gb550: Financial Management - Unit 4
GB550: Financial Management
Unit 4 Assignment
Chapter 24 Question 24-2 Page 964
Security A has an expected rate of return 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of -.25, and a beta coefficient of -0.5. Security B has an expected return of 11% a standard deviation of returns of 10%, a correlation with the market of .75 and a beta coefficient 0.5. Which security is more risky? Why?
From the problem, the standard deviation of Security A is 30% and the standard deviation of Security B is 10%. Now let’s look at the CV of each security:
Security A CV = 30%/6% = 500%
Security B CV = 10%/11% = 91%
We know that the smaller the standard deviation, the less risk is the stock so because Security A has a higher standard deviation and has more variation, it is more risky than Security B.
Chapter 24 Problem 24-8 Page 966 - 967
You are given the following set of data:
Historical Rates of Return
Year NYSE Stock Y
1 4.0% 3.0%
2 14.3 18.2
3 19 9.1
4 -14.7 -6.0
5 -26.5 -15.3
6 37.2 33.1
7 23.8 6.1
8 -7.2 3.2
9 6.6 14.8
10 20.5 24.1
11 30.6 18.0 Mean = 9.8%
Ơ = 19.6% 9.8
13.8%
A. Construct a scatter diagram showing the relationship between returns on stock Y and the market. Use a spreadsheet or a calculator with a linear regression function to estimate beta.
Beta = .62
B. Give a verbal interpretation of what the regression line and the beta coefficient show about the stock Y volatility and relative risk as compared with those of other stocks.
The .62 regression line beta estimate for Stock Y shows the relationship with NYSE stocks, each time NYSE move up a unit, stock Y moves up by .62. This regression line beta estimate for Stock Y also indicates that it is not as risky as the other stocks. It is positively correlated but less volatile.
C. Suppose the regression lines were exactly as shown by your graph from part b but the scatter of points were more spread out. How would this
Unit 4 Assignment
Chapter 24 Question 24-2 Page 964
Security A has an expected rate of return 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of -.25, and a beta coefficient of -0.5. Security B has an expected return of 11% a standard deviation of returns of 10%, a correlation with the market of .75 and a beta coefficient 0.5. Which security is more risky? Why?
From the problem, the standard deviation of Security A is 30% and the standard deviation of Security B is 10%. Now let’s look at the CV of each security:
Security A CV = 30%/6% = 500%
Security B CV = 10%/11% = 91%
We know that the smaller the standard deviation, the less risk is the stock so because Security A has a higher standard deviation and has more variation, it is more risky than Security B.
Chapter 24 Problem 24-8 Page 966 - 967
You are given the following set of data:
Historical Rates of Return
Year NYSE Stock Y
1 4.0% 3.0%
2 14.3 18.2
3 19 9.1
4 -14.7 -6.0
5 -26.5 -15.3
6 37.2 33.1
7 23.8 6.1
8 -7.2 3.2
9 6.6 14.8
10 20.5 24.1
11 30.6 18.0 Mean = 9.8%
Ơ = 19.6% 9.8
13.8%
A. Construct a scatter diagram showing the relationship between returns on stock Y and the market. Use a spreadsheet or a calculator with a linear regression function to estimate beta.
Beta = .62
B. Give a verbal interpretation of what the regression line and the beta coefficient show about the stock Y volatility and relative risk as compared with those of other stocks.
The .62 regression line beta estimate for Stock Y shows the relationship with NYSE stocks, each time NYSE move up a unit, stock Y moves up by .62. This regression line beta estimate for Stock Y also indicates that it is not as risky as the other stocks. It is positively correlated but less volatile.
C. Suppose the regression lines were exactly as shown by your graph from part b but the scatter of points were more spread out. How would this