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. (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 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 2010 because you do not have 2009 data.)

Data as given in the problem are shown below:

Goodman Industries

Landry Incorporated

Market 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

Note: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx. Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Goodman and then copy the cell for the other items.

b. Calculate the standard deviation 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.)

Use the function wizard to calculate the standard deviations.

Goodman

Landry

Index

Standard deviation of returns

?

?

?

c. Estimate Goodmans and Landrys 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). (Hint: use Excels SLOPE function.) Are these betas consistent with your graph?

Goodman's beta =

?

Landry' beta =

?

d. 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

=?

x

=?