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1. (15 points) Problem - historical beta You run a regression of monthly returns of Mapco, an oil and gas-producing firm, on the S&P 500
1. (15 points) Problem - historical beta You run a regression of monthly returns of Mapco, an oil and gas-producing firm, on the S&P 500 Index and come up with the following output for the period 1991-1995: Rmagco=0.0006+0.46xRM and R = 0.05. The Treasury bond rate is 5% and equity risk premium is 5.5%. a. (5 points) Compute Jensen's alpha. What does this value tell you about the managers' abilities at Mapco? b. (5 points) What does R measure? What proportion of this firm's risk is diversifiable? c. (5 points) What would an investor in Mapco's stock require as a rate of return? Construct the 95% confidence interval for the required rate of return for Mapco if the historical standard deviation of Mapco's rate of return is 20% and rate of returns are normally distributed
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