[Solution]Lending/Borrowing Possibilities

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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