P5.28 In the previous chapter's spreadsheet problem, you helped Laura evaluate the risk-return tradeoff for three stand-alone
Question:
P5.28 In the previous chapter's spreadsheet problem, you helped Laura evaluate the risk-return tradeoff for three stand-alone securities. An alternative for Laura is to look at the investment as a portfolio of both IBM and HP and not as stand-alone situations. Laura's professor suggests that she use the capital asset pricing model to define the required returns for the 2 companies (refer to Equations 5.3 and 5.3a): TRp+b; X (Rp)] Laura measures RF using the current long-term Treasury bond return of 5% and measures using the average return on the S&P 500 Index from her calculations in the Chapter 4 spread- sheet problem. She researches a source for the beta information and follows these steps: Go to moneycentral.msn.com. Within the "Get Quote" box, type IBM and press "Go." In the left column, look under Quote, Chart, News" and choose "Company Report." Under the heading of "Stock Activity," find the "Volatility (beta)" figure. Repeat the same steps for the HP stock. Questions
a. What are the beta values for IBM and HP? Assume that the beta for the S&P 500 Index is 1.0. Using the CAPM, create a spreadsheet to determine the required rates of return for both IBM and HP.
b. Laura has decided that the portfolio will be distributed between IBM and HP in a 60% and 40% split, respectively. Hence, a weighted average can be calculated for both the returns and betas of the portfolio. This concept is shown in the spreadsheet for Table 5.2, which can be viewed at www.myfinancelab.com. Create a spreadsheet using the following models for the calculations: where: war w T Wi war = wr; + w;* T weighted average required rate of return for the portfolio weight of security i in the portfolio =required return of security i in the portfolio weight of security in the portfolio T = required return of security ; in the portfolio where: wab wab wb,+w; b weighted average beta for the portfolio w
b, wi bj ==== TO weight of security i in the portfolio beta for security i weight of security / in the portfolio beta for security j
Step by Step Answer:
Fundamentals Of Investing
ISBN: 9780136117049
11th Edition
Authors: Lawrence J. Gitman, Michael D. Joehnk, Scott B. Smart, Scott J. Smart