HW set 3

1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2008 because you do not have 2007 data.)
The rate of return and index are
Year
Goodman
Landry
Index
2013
0.247628
-0.01045
0.328018
2012
-0.04162
0.13223
0.012298
2011
0.627402
-0.10037
0.348187
2010
0.029308
-0.00411
0.14881
2009
0.609266
0.116585
0.191489
The average for Goodman was 29.4%, Landry 2.7% and 20.6% for the index.

2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

Standard Deviation
Goodman
Landry
Market Index

0.314404
0.097073
0.137937352

3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your graph?

4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the required return on the market using the SML equation?
Risk - free weight + beta*market risk =
Required return on market = 6.04%+1*5%=0.1104 or 11.04%

5. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?
Weight of Goodman stock * beta of Goodman stock +weight of Landry stock * beta of Landry stock =
.5 * 1.54 + .5 * -0.56= .49
6.04 + 2.45= 8.49%

6. What dividends do you expect for Goodman