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Following are the rate of return by each year for stock A, B, equity market, government bill and government bond. Year Stock A Stock B
Following are the rate of return by each year for stock A, B, equity market, government bill and government bond.
Year | Stock A | Stock B | Market | Government bill | Government Bond |
2016 | 12% | 8% | 7% | 1.2% | 2.5% |
2017 | 8% | 11% | 7% | 1.5% | 2.2% |
2018 | 5% | 10% | 7% | 1.5% | 2.4% |
2019 | 5% | 7% | 4% | 1.9% | 2.8% |
2020 | 3% | 10% | 8% | 1.4% | 2.2% |
2021 | 15% | 15% | 8% | 1.5% | 2.3% |
- (5 points) Calculate the expected return and standard deviation of stock A, B, and market
- (5 points) Let the correlation coefficient of stock A and B be 0.4. We create a portfolio with 60% stock A and 40% stock B. What is the portfolio expected return and standard deviation?
- (5 points) Calculate the Sharpe ratio of the portfolio created in b)
- (5 points) Calculate the beta of stock A and B
- (5 points) Calculate the expected rate of return for stock A and B based on the Capital Asset Pricing Model (CAPM).
- (5 points) An investor is trying to use the Fama French Three Factor Model to forecast the stock price 1 year from now. Based on the following information calculate the alpha of stock A and B.
Stock A | Stock B | |
Beta (market) | 1.4 | 1.2 |
Beta (size) | 0.4 | 0.6 |
Beta (book-to-market) | -1.1 | -0.9 |
Market risk premium | 7% | 7% |
Size risk premium | 3.70% | 3.70% |
Book-to-market risk premium | 5.20% | 5.20% |
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