Question

Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.2% and the market risk premium is 2.4%
Year	J Corp. Return (%)	Market Return (%)
1	-4.32	-2.10
2	16.30	8.21
3	24.12	12.12
4	16.12	8.12
5	-33.72	-16.80
6	31.64	15.88
7	8.84	4.48
8	26.00	13.06
9	10.08	5.10
10	18.30	9.21
11	-9.70	-4.79
12	-17.72	-8.80

a) What is the beta of J Corp.'s stock?
(1 Mark)(Round your answer to two decimal places)
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?
(Round your answer to one one-hundreth of a percent)

Answer 1

Year	J Corp. Return(x)	Market Return(y)	(x-X)	(y-Y)	Square of (x-X)	Square of (y-Y)	(x-X)*(y-Y)
1	-4.32	-2.10	-11.48	-5.740	131.7904	32.9476	65.8952
2	16.30	8.21	9.140	4.570	83.5396	20.8849	41.7698
3	24.12	12.12	16.960	8.480	287.6416	71.9104	143.8208
4	16.12	8.12	8.960	4.480	80.2816	20.0704	40.1408
5	-33.72	-16.80	-40.880	-20.440	1671.1744	417.7936	835.5872
6	31.64	15.88	24.480	12.240	599.2704	149.8176	299.6352
7	8.84	4.48	1.680	0.840	2.8224	0.7056	1.4112
8	26.00	13.06	18.840	9.420	354.9456	88.7364	177.4728
9	10.08	5.10	2.920	1.460	8.5264	2.1316	4.2632
10	18.30	9.21	11.140	5.570	124.0996	31.0249	62.0498
11	-9.70	-4.79	-16.860	-8.430	284.2596	71.0649	142.1298
12	-17.72	-8.80	-24.880	-12.440	619.0144	154.7536	309.5072
	85.940	43.69			4247.3669(%2)	1061.8415(%2)	2123.683
1	Return of Stock(X)=85.940/12=7.16%
	Return of Market(Y)=43.69/12=3.64%
	Variance of Market = 1061.8415/12 = 88.49(%2)
	Co-Variance of Stock with market = 2123.683/12 = 176.97(%2)
	Beta of J.Corp stock = Co-Variance of Stock with market
	Variance of Market
	Beta of J.Corp stock = 176.97/88.49 = 2.00(apprx)
2	As per CAPM,
	Return of stock = Risk free return + (Risk premium)*Beta of stock
	Return of stock = 1.20% + 2.40%*2
	Return of stock = 6%