Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following information about the share price of Orbison Sunglasses and the S&P 500. Assume the S&P 500 represents the market portfolio. Year Orbison

Consider the following information about the share price of Orbison Sunglasses and the S&P

500. Assume the S&P 500 represents the market portfolio.

Year

Orbison Sunglasses share price ($)

S&P 500

2015

10

400

2016

15

440

2017

18

528

2018

16.2

528

  1. What are the average return and standard deviations of returns for Orbison Sunglasses and the market portfolio over the period 2015-2018 (hint: calculate the returns first)?

  1. Assume the current risk-free rate is 5% and Orbison Sunglasses has a beta of 1.5 with the market portfolio. Assume a market risk premium of 4%. What is the expected share price for Orbison Sunglasses in 2019?
  2. Suppose 2015 is an unexpectedly sunny year, boosting the share price for Orbison Sunglasses to 24.3. What is Orbison Sunglasses alpha (actual return in excess of expected return) in 2019?
  3. Should you use your estimate for alpha that you obtained in question (c) to calculate expectations for future returns? Why (not)?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Of Financial Institutions

Authors: George H Hempel

1st Edition

0133159604, 9780133159608

More Books

Students also viewed these Finance questions