Excel Activity: Evaluating Risk and Return

Start with the partial model in the file Ch$02$ P$15$ Build a Model.xlsx$.$ The file contains data for this problem. Goodman Corporation's and Landry Incorporated's stock prices and dividends, along with the Market Index, are shown here. Stock prices are reported for December $31$ of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends.

Goodman Corporation Landry Incorporated Market Index

Year Stock Price Dividend Stock Price Dividend Includes Dividends

$2021$ $$26\mathrm{.}22$ $$1\mathrm{.}70$ $$74\mathrm{.}88$ $$4\mathrm{.}6817,797\mathrm{.}56$

$202022\mathrm{.}291\mathrm{.}5380\mathrm{.}754\mathrm{.}5613,381\mathrm{.}33$

$201924\mathrm{.}941\mathrm{.}4374\mathrm{.}884\mathrm{.}3413,207\mathrm{.}04$

$201816\mathrm{.}171\mathrm{.}3688\mathrm{.}853\mathrm{.}9310,000\mathrm{.}86$

$201717\mathrm{.}071\mathrm{.}3093\mathrm{.}943\mathrm{.}518,791\mathrm{.}82$

$201611\mathrm{.}421\mathrm{.}2486\mathrm{.}733\mathrm{.}157,335\mathrm{.}22$

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any.

Download spreadsheet Ch$02$ P$15$ Build a Model$-$cd$16$d$9.$xlsx

Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. $($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 then 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 $2016$ because you do not have $2015$ data.$)$ Round your answers to two decimal places.

Year Goodman Corporation Landry Incorporated Market Index

$2021$ fill in the blank $2$

$\%$ fill in the blank $3$

$\%$ fill in the blank $4$

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$2020$ fill in the blank $5$

$\%$ fill in the blank $6$

$\%$ fill in the blank $7$

$\%$

$2019$ fill in the blank $8$

$\%$ fill in the blank $9$

$\%$ fill in the blank $10$

$\%$

$2018$ fill in the blank $11$

$\%$ fill in the blank $12$

$\%$ fill in the blank $13$

$\%$

$2017$ fill in the blank $14$

$\%$ fill in the blank $15$

$\%$ fill in the blank $16$

$\%$

Average fill in the blank $17$

$\%$ fill in the blank $18$

$\%$ fill in the blank $19$

$\%$

Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. $($Hint: Use the sample standard deviation formula, which corresponds to the STDEV.S function in Excel.$)$ Round your answers to two decimal places.

Goodman Corporation Landry Incorporated Market Index

Standard deviation fill in the blank $20$

$\%$ fill in the blank $21$

$\%$ fill in the blank $22$

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Construct a scatter diagram graph that shows Goodman's returns on the vertical axis and the Market Index's returns on the horizontal axis. Construct a similar graph showing Landry's stock returns on the vertical axis. Choose the correct graph.

The correct graph is

$.$

A$.$

B$.$

C$.$

D$.$

Estimate Goodman's and Landry's betas as the slopes of regression lines with stock return on the vertical axis $($y$-$axis$)$ and market return on the horizontal axis $($x$-$axis$).($Hint: Use Excel's SLOPE function.$)$ Round your answers to four decimal places.

Goodman's beta: fill in the blank $24$

Landry's beta: fill in the blank $25$

Are these betas consistent with your graph?

These betas

consistent with the scatter diagrams.

The risk$-$free rate on long$-$term Treasury bonds is $5\mathrm{.}14\%.$ Assume that the market risk premium is $4\%.$ What is the required return on the market? Round your answer to two decimal places.

fill in the blank $27$

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Now use the SML equation to calculate the two companies' required returns. Round your answers to two decimal places.

Goodman's required return: fill in the blank $28$

$\%$

Landry's required return: fill in the blank $29$

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If you formed a portfolio that consisted of $50\%$ Goodman stock and $50\%$ Landry stock, what would its beta and its required return be$?$ Round your answer for the portfolio's beta to four decimal places and for the portfolio's required return to two decimal places.

Portfolio's beta: fill in the blank $30$

Portfolio's required return: fill in the blank $31$

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Suppose an investor wants to include some Goodman Industries stock in his portfolio. Stocks A$,$ B$,$ and C are currently in the portfolio, and their betas are $0\mathrm{.}826,0\mathrm{.}898,$ and $1\mathrm{.}225,$ respectively. Calculate the new portfolio's required return if it consists of $25\%$ Goodman, $20\%$ Stock A$,30\%$ Stock B$,$ and $25\%$ Stock C$.$ Round your answer to two decimal places.

fill in the blank $32$

$\%$