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FFM12, WebApp 08A, TB, 01-28-09

# FFM12, WebApp 08A, TB, 01-28-09 - WEB APPENDIX 8A...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: Conceptual (8A) Zero coupon bond concepts C N Answer: b MEDIUM 1 . Which of the following statements is CORRECT? a. The CAPM is an ex ante model, which means that all of the variables should be historical values that can reasonably be projected into the future. b. The beta coefficient used in the SML equation should reflect the expected volatility of a given stock's return versus the return on the market during some future period. c. The general equation: Y = a + bX + e, is the standard form of a simple linear regression where b = beta, and X equals the independent return on an individual security being compared to Y, the return on the market, which is the dependent variable. d. The rise-over-run method is not a legitimate method of estimating beta because it measures changes in an individual security's return regressed against time. Web App. 8A: Beta Coefficients Conceptual M/C Page 93 WEB APPENDIX 8A CALCULATING BETA COEFFICIENTS

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Problems Problems with * in the topic line are nonalgorithmic. (8A) Beta calculation C N Answer: c MEDIUM 2 . Given the following returns on Stock J and the "market" during the last three years, what is the beta coefficient of Stock J? (Hint: Think rise over run.) Year Stock J Market 1 -13.85% -8.63% 2 22.90% 12.37% 3 35.15% 19.37% a. 1.58 b. 1.66 c. 1.75 d. 1.84 e. 1.93 (8A) Beta calculation C N Answer: b MEDIUM 3 . Stock X and the "market" have had the following rates of returns over the past four years. Year Stock X Market 2005 12.00% 14.00% 2006 5.00% 2.00% 2007 11.00% 14.00% 2008 -7.00% -3.00% 60% of your portfolio is invested in Stock X and the remaining 40% is invested in Stock Y. The risk-free rate is 6% and the market risk premium is also 6%. You estimate that 14% is the required rate of return on your portfolio. What is the beta of Stock Y?
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