9.1 How do lending (borrowing) possibilities change the Markowitz model? 9.4 What is the market portfolio? 9.7 How can we measure a security’s contribution to…

9.1 How do lending (borrowing) possibilities change the Markowitz model?

9.4 What is the market portfolio?

9.7 How can we measure a security’s contribution to the risk of the market portfolio?

9.10 What are the difficulties involved in estimating a security’s beta?

9.13 What is “the law of one price”?

9.21 What is a factor model?

9.25 How can APT be used in investment decisions?

Spreadsheet Exercises

9.1 Assume that the annual price data below is for General Foods and a broad stock market index, covering the period 2003–2018. Calculate the beta for General Foods. Use the ESTLIN function or the SLOPE function in the spreadsheet.

Year

GF

S&P

2018

40.58

1,211.92

2017

48.38

1,111.92

2016

40.96

879.82

2015

43.34

1,148.08

2014

55.38

1,320.28

2013

52.26

1,469.25

2012

59.49

1,229.23

2011

58.72

970.43

2010

45.93

740.74

2009

32.06

615.93

2008

21.93

459.27

2007

18.67

466.45

2006

17.24

435.71

2005

16.3

417.09

2004

9.29

330.22

2003

7.57

353.4

9.2 Given the information below, calculate the portfolio beta and the expected return on this two-stock portfolio using the CAPM.

If the weights were 50/50, would this increase or decrease the portfolio return?

If the market’s expected return had been 8 percent with the 60/40 weights, would this increase or decrease the portfolio return?

Market’s Expected Return

9%

Risk-Free Rate

2.50%

Beta for Bateman Industries

0.98

Beta for Advanced Solar Arrays

1.34

Weight for Bateman

60%

Weight for Solar Arrays

40%

Portfolio Beta

Expected Return on the Portfolio

Assignment status: Solved by our experts

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