Question

In: Accounting

a) CEMENCO Stock Return YEAR &nbsp

a) CEMENCO Stock Return

YEAR CEMENCO RETURN

2000 13.9%

2001 20.0%

2002 11.6%

2003 2.8%

2004 3.6%

2005 -16.3%

2006 47.3%

2007 -12.7%

Find the Average Return and Risk (as measured by Standard Deviation) of CEMENCO since 2000.

b) You have a portfolio consisting of 20 percent CEMENCO stock (β = 0.81), 40 percent of Monrovia Breweries (Club Beer) stock ((β = 1.67). How much market risk does the portfolio have? How does this compare with the general market?

c) Data from the last eight decades for S & P 500 index yield the following statistics: average excess return = 7.9%; Standard Deviation = 23.2%.

(i)To the extent that these averages approximated investor expectations for the period, what must have been the average coefficient of risk aversion? Formula: E (r_m) – r_f = Ā ẟ²_m

(II)If the coefficient of risk aversion were actually 3.5, what risk premium would have been consistent with the market’s historical standard deviation?

d) A portfolio’s return is 12%, its standard deviation is 20% and the risk-free rate is 4%. Which of the following would make the greatest increase in the portfolio’s Sharpe ratio?

An increase of 1% in expected return?

A decrease of 1% in the risk-free rate?

A decrease of 1% in its standard deviation?

Expert Solution

a)
YEAR CEMENCO RETURN	CEMENCO Stock Return
2000	13.90%
2001	20.00%
2002	11.60%
2003	2.80%
2004	3.60%
2005	-16.30%
2006	47.30%
2007	-12.70%
Average Return = using excel function Average	8.77%
Average Risk = using excel function STDEV	19.99%

b)	% invested	Beta	Beta x % invested
CEMENCO stock	20.00%	0.81	0.162
Monrovia Breweries (Club Beer)	80.00%	1.67	1.336
Portfolio Beta			1.498
Market Beta is normally 1 but it is greater than 1 , the portfolio is more risky

c)
a) Coefficient of risk =7.9%/23.2%^2	1.47
b) Risk Premium = 3.5 x 23.2%^2	18.84%

d)
Sharpe Ratio = (Expected Return – Risk Free Return) / Standard Deviation
SR = (12% - 4%)/20%	0.4
An increase of 1% in expected return
SR = (13% - 4%)/20%	0.45
A decrease of 1% in the risk-free rate
SR = (12% - 3%)/20%	0.45
A decrease of 1% in its standard deviation?
SR = (12% - 4%)/19%	0.42
A 1 percentage point increase in expected return and 1 percentage point decrease in the riskfree rate will have the same impact of increasing Sharpe ratio from .40 to .45

ekkarill92 answered 1 year ago

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