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Problem Four (15 marks) You work for a small investment management firm. You have been provided...

Problem Four

You work for a small investment management firm. You have been provided with the following historical information for three stocks and the market index. The information is shown in the table below.

            AAA Inc.

BBB Inc.

CCC Inc.

Stock Price

Dividend

Stock Price

Dividend

Stock Price

Dividend

Market Index

2012

$35

$1.20

$110

$0.45

$100

$1.50

10,840

2013

$40

$1.40

$120

$0.50

$85

$1.50

11,320

2014

$45

$1.40

$98

$0.55

$95

$1.60

12,220

2015

$50

$1.70

$115

$0.65

$110

$1.65

13,325

2016

$42

$1.85

$140

$0.75

$105

$1.65

12,500

2017

$52

$1.85

$150

$0.90

$125

$1.75

13,820

2018

$70

$1.90

$120

$1.00

$140

$1.90

14,400

Using the data provided you are to calculate the following for each of the stocks and the market index.

  1. What is the annual return for the past six years?
  2. What is the average annual return for the past six years?
  3. What is the geometric average annual return (effective annual rate of return) for the past six years?
  4. What is the population standard deviation and the sample standard deviation?
  5. What is the sample covariance and correlation coefficient between Stocks AAA and BBB? Between Stocks AAA and CCC? Between Stocks BBB and CCC?
  6. What is the coefficient of variation for each of the stocks and the market index?
  7. What is the beta of each of the stocks? You can use Excel’s “slope” function to estimate this.
  8. Assuming that the beta of stock AAA is 0.80, the beta of stock BBB is 1.2 and the beta of stock CCC is 1.6. What is the beta of a portfolio where the weight in stock AAA is 20% the weight in stock BBB is 50% and the weight in stock CCC is 30%.
  9. Assuming the risk free rate is 3% and the expected return on the market is 7% what is the expected return on the portfolio in part (h) above?

Please answer question using excel functions with in cell viewing.

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