Question 2 [15 points] The following table shows estimates of the risk of stock G, stock H and the AEX. The listed volatility is the standard deviation of the asset return over next year. Assume CAPM holds with AEX taken as the market portfolio. The listed covariance is the covariance of asset returns with AEX-returns. | Beta of Equity (1) not given stock G stock H AEX price (euro) 20 10 320 volatility 80% 80% 30% covariance 0.0675 not given not given expected return not given 20% 12% not given a. Briefly explain how can be estimated from historical prices (for example, as you did this for the assignments). Also give a financial interpretation of B, in one sentence. b. Complete the table, i.e, reconstruct the 5 figures that are not given in the table. The correlation between returns of stoch G and His - 0.5 (that is, minus 12). c. An investor owns 1000 stocks H. How many of stock G should he buy in order to achieve the same level of systematic risk as the AEX? Determine also the volatility and the R2 of this portfolio. The expected level of annual dividend of stock H is 0.25 euro each year, the first dividend payment is at October 20, 2005. d. Is there any target ratio and adjustment rate in Lintner's model for dividends in line with these expected dividends? Motivate your answer. e. Determine the certainty equivalent (CEQ) of the dividend payment in year 2005, and also of the dividend payment in 2014. Question 2 [15 points] The following table shows estimates of the risk of stock G, stock H and the AEX. The listed volatility is the standard deviation of the asset return over next year. Assume CAPM holds with AEX taken as the market portfolio. The listed covariance is the covariance of asset returns with AEX-returns. | Beta of Equity (1) not given stock G stock H AEX price (euro) 20 10 320 volatility 80% 80% 30% covariance 0.0675 not given not given expected return not given 20% 12% not given a. Briefly explain how can be estimated from historical prices (for example, as you did this for the assignments). Also give a financial interpretation of B, in one sentence. b. Complete the table, i.e, reconstruct the 5 figures that are not given in the table. The correlation between returns of stoch G and His - 0.5 (that is, minus 12). c. An investor owns 1000 stocks H. How many of stock G should he buy in order to achieve the same level of systematic risk as the AEX? Determine also the volatility and the R2 of this portfolio. The expected level of annual dividend of stock H is 0.25 euro each year, the first dividend payment is at October 20, 2005. d. Is there any target ratio and adjustment rate in Lintner's model for dividends in line with these expected dividends? Motivate your answer. e. Determine the certainty equivalent (CEQ) of the dividend payment in year 2005, and also of the dividend payment in 2014
