Question

Q3.

Consider the CEO of “Zeus Engineering” who knows very well how to use the Bloomberg Terminals and download the most contemporary data in the global financial markets. He calculates the historical returns by employing the CAPM MODEL.

Consider the following table and assist him in order to estimate the following relationships for Kronos (K) and Titan (T) Multinationals (hereafter, MNEs).

YEAR             MNE (K)                    MNE (T)                    MARKET

2016                14%                            13%                             12%

2017                19%                            7%                             10%

2018                -16%                           - 5%                            -12%

2019                   3%                            1%                                1%

2020                20%                            11%                             15%

Assume that the Risk-Free Rate is 2%

1. What are the betas of the MNE’s K and T respectively?
2. What are the required rates of return for MNE’s K and T?
3. Are stocks for the MNE K and T aggressive or defensive stocks?
4. What is the slope of the SML LINE for MNE stocks K and T respectively? Draw them carefully and provide comments and explanations for the Sharpe’s and Treynor’s Ratios.
5. How different is the CAPM model from the Mean Variance Model?
6. What is the Efficient Frontier? Carefully explain your answer.               

Answer 1

Year	MNE	K	Market reurn	(MNE-MNE retun )^2		(k-K return)^2		(M-M return)^2		(M-M return)(k-K return)		(M-M return)(MNE-MNE retun )
2016	14	13	12	(14-8)^2	36	(13-5.4)^2	57.76	(12-5.2)^2	46.24	(12-5.2)*(13-5.4)	51.68	(14-8)*(12-5.2)	40.8
2017	19	7	10	(19-8)^2	121	(7-5.4)^2	2.56	(10-5.2)^2	23.04	(10-5.2)*(13-5.4)	36.48	(19-8)*(10-5.2)	52.8
2018	-16	-5	-12	(-16-8)^2	576	(-5-5.4)^2	108.16	(-12-5.2)^2	295.84	(-12-5.2)*(13-5.4)	-130.72	(-16-8)*(-12-5.2)	412.8
2019	3	1	1	(3-8)^2	25	(1-5.4)^2	19.36	(1-5.2)^2	17.64	(1.5-5.2)*(13-5.4)	-28.12	(3-8)*(1-5.2)	21
2020	20	11	15	(20-8)^2	144	(11-5.4)^2	31.36	(15-5.2)^2	96.04	(15-5.2)*(13-5.4)	74.48	(20-8)*(15-5.2)	117.6
	40	27	26		902		219.2		478.8		3.8		645

	MNE	K	Market
mean	40/5	.27/5	.26/5
Expected return	8	5.4	5.2
standard deviation	square root of 902/5-1	square root of 219.2/5-1	square root of 478.8/5-1
SD	15.02	7.4	10.94
Variance	225.6004	54.76	119.6836
beta of	645/478.8	3.8/478.8
beta of	1.347117794	0.007936508

	MNE	K
CAPm	2%+1.35(8%-2%)	2%+0.007972(8%-2%)
CAPM return	11.9	2.047616

SML line=risk free rate+(market return-risk free rate)/beta of market*beta of stock
Beta of the market is always 1
Market return is 8 as calculated above