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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 |
- 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)?
- 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?
- 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?
- Should you use your estimate for alpha that you obtained in question (c) to calculate expectations for future returns? Why (not)?
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