Question

You hear on the news that the​ S&P 500 was down 2.1% today relative to the​ risk-free rate​ (the market's excess return was - 2.1 %) . You are thinking about your portfolio and your investments in Zynga and Proctor and Gamble.

a. If​ Zynga's beta is 1.1​, what is your best guess as to​ Zynga's excess return​ today? (round to one decimal place)

b. If Proctor and​ Gamble's beta is 0.4​, what is your best guess as to​ P&G's excess return​ today? (round to one decimal place)

Answer 1

a. According to question since S&P is proxy for the market and it was down 2.1% relative to risk free rate, hence market excess return = Return of S&P 500 - risk free rate = -2.1%

Beta of Zynga = 1.1

Zynga's excess return = Expected return of Zynga - risk free rate

We Know according to capital asset pricing model

Expected return of Zynga = Risk free rate + Beta x Market excess return

Expected return of Zynga - Risk free rate = Beta x Market excess return = 1.1 x -2.1% = 1.1 x -0.021 = -0.0231 = -2.31%

Excess return of Zynga today = -2.31% = -2.3% (rounded to one decimal place)

b. According to question since S&P is proxy for the market and it was down 2.1% relative to risk free rate, hence market excess return = Return of S&P 500 - risk free rate = -2.1%

Beta of Procter & Gamble= 0.4

Procter and Gamble's excess return = Expected return of Procter & Gamble - risk free rate

We Know according to capital asset pricing model

Expected return of Procter & Gamble= Risk free rate + Beta of Procter & Gamble x Market excess return

Expected return of Procter & Gamble - Risk free rate = Beta of Proctor & Gamble x Market excess return = 0.4 x -2.1% = 0.4 x -0.021 = -0.0084 = -0.84% = -0.8% (rounded to one decimal place)

Excess return of Proctor & Gamble today = -0.8%