Chapter 10: Return and Risk: The Capital-Asset-Pricing Model (CAPM)
10.1 a. Expected Return = (0.1)(-0.045) + (.2)(0.044) + (0.5)(0.12) + (0.2)(0.207)
= 0.1057
= 10.57%
The expected return on Q-mart’s stock is 10.57%.
b. Variance (s2) = (0.1)(-0.045 – 0.1057)2 + (0.2)(0.044 – 0.1057)2 + (0.5)(0.12 – 0.1057)2 +
(0.2)(0.207 – 0.1057)2
= 0.005187
Standard Deviation (s) = (0.005187)1/2
= 0.0720
= 7.20%
The standard deviation of Q-mart’s returns is 7.20%.
10.2 a. Expected ReturnA = (1/3)(0.063) + (1/3)(0.105) + (1/3)(0.156)
= 0.1080
= 10.80%
The expected return on Stock A is 10.80%.
Expected ReturnB = (1/3)(-0.037) + (1/3)(0.064) + (1/3)(0.253)
= 0.933
= 9.33%
The expected return on Stock B is 9.33%.
b. VarianceA (sA2) = (1/3)(0.063 – 0.108)2 + (1/3)(0.105 – 0.108)2 + (1/3)(0.156 – 0.108)2
= 0.001446
Standard DeviationA (sA) = (0.001446)1/2
= 0.0380
= 3.80%
The standard deviation of Stock A’s returns is 3.80%.
VarianceB (sB2) = (1/3)(-0.037 – 0.0933)2 + (1/3)(0.064 – 0.0933)2 + (1/3)(0.253 – 0.0933)2
= 0.014447
Standard DeviationB (sB) = (0.014447)1/2
= 0.1202
= 12.02%
The standard deviation of Stock B’s returns is 12.02%.
c. Covariance(RA, RB) = (1/3)(0.063 – 0.108)(-0.037 – 0.0933) + (1/3)(0.105 – 0.108)(0.064 – 0.933)
+ (1/3)(0.156 – 0.108)(0.253 – 0.0933)
= 0.004539
The covariance between the returns of Stock A and Stock B is 0.004539.
Correlation(RA,RB) = Covariance(RA, RB) / (sA * sB)
= 0.004539 / (0.0380 * 0.1202)
= 0.9937
The correlation between the returns on Stock A and Stock B is 0.9937. |