A. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average returns over the five-year period. Data as given in the problem are shown below:
Goodman Industries Landry Market
Incorporated Index
Year Stock Price Dividend Stock Price Dividend Includes Divs.
2016 $25.88 $1.73 $73.13 $4.50 17,495.97
2015 $22.13 $1.59 $78.45 $4.35 13,178.55
2014 $24.75 $1.50 $73.13 $4.13 13,019.97
2013 $16.13 $1.43 $85.88 $3.75 9,651.05
2012 $17.06 $1.35 $90.00 $3.38 8,403.42
2011 $11.44 $1.28 $83.63 $3.00 7,058.96
We now calculate the rates of return for the two companies and the index:
Goodman Landry Index
2016
2015
2014
2013
2012
Average
B. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index.
Use the function wizard to calculate the standard deviations.
Goodman Landry Index
Standard deviation of returns
C. Construct a scatter diagram graph that shows Goodman’s and Landry’ returns on the vertical axis and the Market Index’s returns on the horizontal axis.
is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we reformat the returns data calculated above and show it just below.
Year Index Goodman Landry
2016 0.0% 0.0% 0.0%
2015 0.0% 0.0% 0.0%
2014 0.0% 0.0% 0.0%
2013 0.0% 0.0% 0.0%
2012 0.0% 0.0% 0.0
D. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock returns on the vertical axis (y-axis) and market return on the horizontal axis (x-axis).
E. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.
Market risk premium (RPM) = 5.000%
Risk-free rate = 6.040%
Expected return on market = Risk-free rate + Market risk premium
= 6.040% + 5.000%
= 11.040%
Required return = Risk-free rate + Market Risk Premium x Beta
Goodman:
Required return =
Landry:
Required return =
F. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?
The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta would be:.