Question

MONTH   ZEMIN CORP.   MARKET
1 7% 4%
2 2% 1%
3 2% 2%
4 -3% -1%
5 4% 2%
6   2% 3%

a. Given the​ holding-period returns shown above, compute the average returns and the standard deviations for the Zemin Corporation and for the market.

b. If​ Zemin's beta is 1.04 and the​ risk-free rate is 9 ​percent, what would be an appropriate required return for an investor owning​ Zemin? ​(​Note: Because the returns of Zemin Corporation are based on monthly​ data, you will need to annualize the returns to make them compatible with the​ risk-free rate. For​ simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by​ 12.)

c. How does​ Zemin's historical average return compare with the return you believe to be a fair​ return, given the​ firm's systematic​ risk?

a. The average monthly return for the Zemin Corporation is ____%. ​(Round to two decimal​ places.)

The average monthly return for the market is ____%. ​(Round to two decimal​ places.)

The standard deviation for the Zemin Corporation is ____​%. ​(Round to two decimal​ places.)

The standard deviation for the market is ____%. ​(Round to two decimal​ places.)

b. If​ Zemin's beta is 1.04 and the​ risk-free rate is 9 ​percent, an appropriate required return for an investor owning Zemin would be _____%. ​(Round to two decimal​ places.)

c. Given the​ stock's systematic​ risk, Zemin's historical return is ______ what we would consider a fair return.

Answer 1

A-
Calculation of average return
Month	Zemin Corp in %		Month	Marrket return
1	7		1	4
2	2		2	1
3	2		3	2
4	-3		4	-1
5	4		5	2
6	2		6	3
Average return =Using average function in M S excel	AVERAGE(F443:F448)	2.33	Average return =Using average function in M S excel	AVERAGE(I443:I448)	1.83
annualized average return	2.33*12	27.96	annualized average return	1.83*12	21.96
Calculation of standard deviation of return
Month	Zemin Corp in %		Month	Marrket return
1	7		1	4
2	2		2	1
3	2		3	2
4	-3		4	-1
5	4		5	2
6	2		6	3
standard deviation of return =Using stdevp function in M S excel	2.98	2.98	standard deviation of return =Using stdevp function in M S excel	1.57	1.57
B-
required return on ZEMIN stock = risk free rate+(market return-risk free rate)*beta		9+(21.96-9)*1.04	22.48
risk free rate	9%
market return	1.83
beta	1.04
c-Zemin's historical average return of 27.96 % is significantly above the considered fair return of 22.48%, given the firm's systematic risk.