evaluating risk and return 457883

Bartman Co. Reynolds, Inc. Winslow 5000

Year Stock Price Dividend Stock Price Dividend Includes Dividends

2010 17250 1.15 48750 3.00 11663.98

2009 14750 1.06 52300 2.90 8785.70

2008 16500 1.00 48750 2.75 8679.98

2007 10750 .95 57250 2.50 6434.03

2006 11375 .9 60000 2.25 5602.28

2005 7625 .85 55750 2.00 4705.97

Bartman Industries’ and Reynolds Inc.’s stock prices and dividends, along with the Winslow 5000 data are shown above. Winslow 5000 data are adjusted to include dividends.

a. Use the data to calculate annual rates of return for all three. Then calculate each entity’s average return over the 5 year period. (you cannot calculate 2005 due to not have 2004 info).

b. Calculate the standard deviations of the returns for all three.

c. Calculate the coefficients of variation for all three.

e. Estimate Bartman’s and Reynolds’ betas by running regressions of their returns against the index’s returns.

f. Assume that the risk free rate on long term Treasury bonds is 6.04%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market’s required return it is too high. So use 11% as the expected return on the market. Use the SML equation to calculate the two companies’ required returns.

g. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolios’s beta and required return be?

h. Suppose an investor wants to include Bartman Industries’ stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are .769, .985, and 1.423, respectively. Calculate the new portfolio’s required return if it consists of 25% of Bartman, 15% of Stock A, 40% of Stock B, and 20% of Stock C.

I’m SO lost…