Beruflich Dokumente
Kultur Dokumente
Covariance = x , y =
( X i x ) (Yi y )
i =1
AT&T Ret
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
AVE
STD
VAR
SUM
SA Ret
80.95%
-47.37%
31.00%
132.44%
32.02%
25.37%
-28.57%
0.00%
11.67%
36.19%
27.37%
51.36%
26.38%
58.26%
-33.79%
29.88%
30.35%
2.94%
-4.29%
28.86%
-6.36%
48.64%
23.55%
17.80%
27.89%
7.78%
n 1
50/50 Port
Ret
69.61%
-40.58%
30.44%
81.40%
17.48%
10.54%
0.15%
-3.18%
30.16%
29.87%
22.59%
35.23%
12.41%
SA ret AT&T A
SA Ave
Ave
53.58%
40.46%
-74.74%
-51.59%
3.63%
12.08%
105.07%
12.55%
4.65%
-14.86%
-2.00%
-22.09%
-55.94%
11.06%
-27.37%
-24.16%
-15.70%
30.84%
8.82%
5.75%
Product
Col 5 x 6
21.68%
38.56%
0.44%
13.18%
-0.70%
0.44%
-6.20%
6.61%
-4.80%
0.51%
69.70%
Expected return if you have an equally weighted portfolio of the three companies,
1/3 invested in each company, W1 = W2 = W3 = 0.33333
Expected return for the portfolio = W1 x E(return of Sony) + W2 x E(return of Tesoro) +
W3 x E(return of Storage Technology)
= 1/3 x 0.11 + 1/3 x 0.09 + 1/3 x 0.16 = 0.12 or 12%
Expected Variance of the portfolio = (W1)2 x (1)2 + (W2)2 x (2)2 + (W3)2 x (3)2
+ 2 (W1)(W2)( 1,2)( 1)( 2) + 2 (W1)(W3)( 1,3)( 1)( 3) +2 (W2)(W3)( 23)( 2)( 3)
= (1/3)2 (0.23)2 + (1/3)2 (0.27)2 + (1/3)2 (0.50)2
+ 2 (1/3) (1/3) (-0.15)(0.23)(0.27) + 2 (1/3) (1/3) (-0.25)(0.23)(0.50)
+ 2 (1/3) (1/3) (0.20)(0.27)(0.50)
= 0.0058778 + 0.0081 + 0.027777 0.00207 0.063889 + 0.006
= 0.0392967
Standard Deviation = (0.0392967)1/2 = 0.1982 or 19.82%
Problem 12
Year
Scientific Atlantic
1989
+0.8095
1990
- 0.4737
1991
+0.3100
1992
+1.3244
1993
+0.3202
1994
+0.2537
1995
- 0.2857
1996
0.0000
1997
+0.1167
1998
+0.3619
Average
+0.2737
Covariance of Scientific Atlantic and Market
( SA, MKT ) =
( Obs
i , SA
Market Portfolio
+0.3149
- 0.0317
+0.3057
+0.0758
+0.1036
+0.0255
+0.3757
+0.2268
+0.3310
+0.2832
+0.2011
SA )( Obs1,MKT MKT )
( n 1)
Find the difference between each observation of SA and its mean times the difference between
each market return and its mean and divide the sum of these products by number of observations
minus two (a correction for degrees of freedom)
SA Return
+0.8095
- 0.4737
+0.3100
Obs - average
+0.5358
- 0.7474
+0.0363
MKT Return
+0.3149
- 0.0317
+0.3057
Obs - average
+0.11385
- 0.23275
+0.10465
Col 2 x Col 4
+0.061308225
+0.173957350
+0.003798795
+1.3244
+0.3202
+0.2537
- 0.2857
0.0000
+0.1167
+0.3619
+1.0507
+0.0465
- 0.0200
- 0.5594
- 0.2737
- 0.1570
+0.0882
+0.0758
+0.1036
+0.0255
+0.3757
+0.2268
+0.3310
+0.2832
- 0.12525
- 0.09745
- 0.17555
+0.17465
+0.02575
+0.12995
+0.08215
Sum of Col 5
- 0.131600175
- 0.004531425
+0.003511000
- 0.097699210
- 0.007047775
- 0.020402150
+0.007245630
- 0.011767130
= ( MKT , MKT ) =
2
MKT Return
+0.3149
- 0.0317
+0.3057
+0.0758
+0.1036
+0.0255
+0.3757
+0.2268
+0.3310
+0.2832
( Obs
Obs - average
+0.11385
- 0.23275
+0.10465
- 0.12525
- 0.09745
- 0.17555
+0.17465
+0.06695
+0.12995
+0.08215
Sum of Col 3
MKT )
( n 1)
i ,MKT
Col 2 Squared
+0.012961823
+0.054172563
+0.010951623
+0.015687563
+0.009496503
+0.030817803
+0.030502623
+0.000663063
+0.016887003
+0.006748623
+0.188889185
Problem 13
United Airline beta of 1.5
Standard deviation of the Market Portfolio is 22% (0.22)
United Airline standard deviation of 60% (0.60)
a. Estimate the correlation between United Airlines and the Market Portfolio
We know that the beta is the covariance of UA and the Market divided by the Markets variance.
So, the covariance of UA and the Market is the Markets Variance times UAs beta.
Problem 14
APM (Should be APT)
Factor
1
2
3
4
5
Beta
1.2
0.6
1.5
2.2
0.5
Risk Premium
2.5%
1.5%
1.0%
0.8%
1.2%
Bethlehem Steel Expected Return = risk-free rate + (1.2) (2.5%) + (0.6) (1.5%) + (1.5) (1.0%) +
(2.2) (0.8%) + (0.5) (1.2%)
a. The greatest risk factor for Bethlehem Steel is factor number 4 but we can not directly
identify this factor.
b. The expected return for BS with a 5% risk-free rate is:
E(r) = 5.0% + (1.2) (2.5%) + (0.6) (1.5%) + (1.5) (1.0%) + (2.2) (0.8%) + (0.5) (1.2%)
E(r) = 5.0% + 3.0% + 0.9% + 1.5% + 1.76% + 0.6% = 12.76%
c. Using CAPM we get the following expected return:
E(r) = 5.0% + (1.1) (5.0%) = 5.0% + 5.5% = 10.5%
d. The returns are different using the different models for a numbers of reasons
Problem 15
Emerson Electrics Expected Return = risk-free rate + (0.5) (1.8%) + (1.4) (0.6%) + (1.2) (1.5%)
+ (1.8) ((4.2%)
If the current risk-free rate is 6% we would estimate the expected return for Emerson at
E(r) = 6.0% + (0.5) (1.8%) + (1.4) (0.6%) + (1.2) (1.5%) + (1.8) ((4.2%)
Problem 16
The Fama-French Model has:
Expected Monthly Return = 1.77% - 0.11% ln (MV) + 0.35% ln (MV/BV)
MV is the market value of the firm, BV is the book value of the firm
a. Lucent Technologies has a market value of $240 billion and a book value of $73.5
billion, estimate its expected return for the coming year with Fama-French
ln (240) = 5.480638923
ln (73.5/240) = -1.183353517
E(r) = 0.0177 - 5.48 (0.0011) - 1.18 (0.0035) = 0.0177 0.00603 - 0.00414 = 0.00752
To estimate the annual return from the monthly return you can compound
Annual Expected Return = (1 + 0.00752)12 1 = 0.094192 or 9.42%
b. Using CAPM we get the following expected return:
E(r) = 6.0% + (1.55) (5.5%) = 6.0% + 8.525% = 14.525%
c. The returns are different using the different models for a numbers of reasons