6-12A (Measuring risk and rates ofreturn)

a. Given the following holding-period rerurns, compute the average rerurns and the standard deviations for the Zemin Corporation and for the market.

MONTH ZEMIN CORP•. MARKET 1 60/0 4%

2 3 2 3 1 -1 4 -3 -2 5 5 2 6 0 2

b. If Zemin's beta is 1.54 and the risk-free rate is 8 percent, what would be an appropriate required rerum for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the rerurns to make them comparable with the risk-free rate. For simplicity, you can conven 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?