Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

It is November, 2017. The following variance-covariance matrix, for the market (S&P 500) and stocks T and U, is based on monthly data from November

It is November, 2017. The following variance-covariance matrix, for the market (S&P 500) and stocks T and U, is based on monthly data from November 2012 to October 2017. Assume T and U are included in the S&P 500. The betas for T and U are T = 0.727 and U = 0.75.

S&P 500 T U

S&P 500 .0256 .0186 .0192

T .0186 .1225 .0262

U .0192 .0262 .0900

Average monthly risk premiums from 2002 to 2007 were: S&P500 : 1.0%

  1. T :0.6%
  2. U :1.1%

Assume the CAPM is correct, and that the expected future market risk premium is 0.6% per month. The risk-free interest rate is 0.3% per month.

a. What were the alpha's for stocks T and U over the last 60 months?

b. What are the expected future rates of return for T and U?

c. What are the optimal portfolio weights for the S&P 500, T and U? Explain qualitatively.

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_2

Step: 3

blur-text-image_3

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

Horngrens Financial And Managerial Accounting The Financial Chapters

Authors: Tracie L. Miller Nobles, Brenda L. Mattison, Ella Mae Matsumura

6th Edition

978-0134486840, 134486838, 134486854, 134486846, 9780134486833, 978-0134486857

More Books

Students also viewed these Finance questions

Question

Distinguish between joint products and by-products, lop7

Answered: 1 week ago

Question

Distinguish alternative methods of accounting for by-products. koi5

Answered: 1 week ago