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Bonus Quiz 02 Solution

# Bonus Quiz 02 Solution - Solution to bonus quiz 2 December...

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Solution to bonus quiz 2 December 8, 2008 Our first task is to calculate stock returns and market returns based on the raw data we received in the spreadsheet. Here, the important thing is to make sure that stock return and risk-free return (already calculated) refer to the same period. As the problem states:“ the risk-free rate as of 10/01/08 refers to the risk-free rate from 10/01/2008 to 11/01/2008 ”. Worksheet ”Returns” contains returns based on the raw data. Please see the for- mulas contained in the cells. Now, if we divide adjusted closing price as of 11/3/2008 by adjusted closing price as of 10/1/2008 and subtract one, we obtain stock return for the period 10/1/2008 to 11/3/2008, and the risk-free rate corresponding to that period will be in cell “L9” of worksheet “Data”. Also, note that due to calculating returns, we lose the first observation (last row in worksheet “Data”). Now in ”Returns” we have stock and market returns with corresponding risk-free returns. In the worksheet ”Excess returns” we calculate excess returns simply by subtracting the risk-free return from respective returns for each date. Note that now we have all that we need to calculate the equity betas of respective companies.

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