Question

You are working for the CFO of AT&T. You collect stock return data from 1995 to 2016 (23 years of data): average return: 9.9%; standard deviation: 23.1%; market average excess return: 8.5%; market SD: 14.5%; average risk-free rate: 2.3%.

1. What was AT&T’s Sharpe ratio (the ratio of average excess return to standard deviation) over the period? What was the market’s Sharpe ratio?

2. What is the standard error of the sample average AT&T return? Provide a 95% and 99% confidence interval.

3. You also look at the AT&T beta which is 0.4. Is AT&T’s beta above or below average?

4. If, over the next week, the market goes up by 2%, what do you expect the AT&T stock return to be?

Answer 1

Answer to Question 1 :

AT&T's Sharpe ratio over the period is 32.9%

Market's Sharpe ratio - 42.76%

Answer to Question 2 :

Standard error of sample average - 4.8167

Answer to Question 3 :

AT&T's Beta is 0.4 is above the average Beta

Answer to Question 4 :

Expected stock return is 12.386%