financial investing

In this assignment, assume that you are nearing graduation and applying for a job with a financial services firm.  As part of the evaluation process, you are asked to provide answers to a series of questions on risk return and the capital asset pricing model. Your responses will be based on the data for Company A and Company B below.

Year

Company A’s Return

Company B’s Return

Average Market Return

1995

5.0%

4.0%

2.0%

1996

4.0%

-8.0%

6.0%

1997

3.0%

2.0%

7.0%

1998

4.0%

5.0%

8.0%

1999

8.0%

3.0%

9.0%

2000

5.0%

4.0%

10.0%

2001

4.0%

1.0%

11.0%

2002

4.0%

8.0%

10.0%

2003

4.0%

9.0%

9.0%

2004

7.0%

10.0%

8.0%

2005

8.0%

-2.0%

7.0%

2006

9.0%

7.0%

6.0%

2007

10.0%

5.0%

5.0%

2008

7.0%

4.0%

6.0%

2009

-4.0%

2.0%

7.0%

2010

-5.0%

11.0%

8.0%

Procedure

  1.  For each company,
    1. Determine the mean and standard deviation of the returns.
    2. Calculate the coefficient of variation.
    3. Determine which company appears to be more volatile with respect to its risk.
    4. Identify the company with which you would choose to invest.
  2. Using the CAPM, compute the expected return rate of return for Companies A and B. Assume a Market Risk Premium of 3%, a Risk-Free Rate of 4%, a Beta for company A of .90 and a Beta for company B of 1.3.
  3. Using the CAPM, compute the expected rate of return for a portfolio with 25% stake in company A and a 75% stake in company B.  Assume a Market Risk Premium of 3% and a Risk-Free Rate of 4%.

 
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