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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%

  1. (5 points) Calculate the expected return and standard deviation of stock A, B, and market
  2. (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?
  3. (5 points) Calculate the Sharpe ratio of the portfolio created in b)
  4. (5 points) Calculate the beta of stock A and B
  5. (5 points) Calculate the expected rate of return for stock A and B based on the Capital Asset Pricing Model (CAPM).
  6. (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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