Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 5 [18 Marks] The table below sets out the monthly total return, market capitalization, and research spending for ten firms over the four months

Question 5 [18 Marks]

The table below sets out the monthly total return, market capitalization, and research spending for ten firms over the four months from January 2020 to April 2020 inclusive. Each figure was observed at the end of the corresponding month.

Monthly Return (%)

Firm1

Firm2

Firm3

Firm4

Firm5

Firm6

Firm7

Firm8

Firm9

Firm10

Jan

9%

-9%

-3%

5%

10%

-3%

5%

10%

5%

-10%

Feb

-8%

10%

-6%

-7%

1%

-2%

-7%

6%

4%

9%

Mar

-3%

-10%

-1%

-7%

2%

0%

-5%

-7%

6%

10%

Apr

10%

-10%

-4%

4%

9%

8%

-2%

2%

4%

4%

Market Capitalization ($ bn)

Firm1

Firm2

Firm3

Firm4

Firm5

Firm6

Firm7

Firm8

Firm9

Firm10

Jan

306

255

505

693

104

147

310

432

546

612

Feb

282

281

475

644

105

144

288

458

568

667

Mar

273

252

470

599

107

144

274

426

602

734

Apr

300

227

451

623

117

156

268

434

626

763

Research Spending (%)

Firm1

Firm2

Firm3

Firm4

Firm5

Firm6

Firm7

Firm8

Firm9

Firm10

Jan

0%

11%

5%

0%

2%

17%

13%

7%

2%

3%

Feb

1%

17%

4%

4%

3%

20%

7%

20%

7%

0%

Mar

12%

1%

9%

4%

10%

15%

14%

3%

8%

4%

Apr

18%

0%

13%

2%

0%

14%

1%

16%

4%

18%

  1. Calculate the value-weighted average returns in April 2020 for each of the quintile portfolios formed by sorting on lagged Research Spending. Use lagged market capitalization for calculating value-weighted returns. (Hint: There are five quintile portfolios, each containing one fifth of all the stocks.)

[7 Marks]

  1. Calculate the value-weighted quintile hedge portfolio returns (aka factor portfolio returns equal to Quintile 5 minus Quintile 1 returns) in February, March, and April 2020.

[7 Marks]

  1. Briefly explain why portfolios need to be sorted on lagged Research Spending to test return predictability.

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

Step: 3

blur-text-image

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

Practical Guide To Auditing SAP Systems

Authors: Martin Metz, Sebastian Mayer

1st Edition

3960126409, 978-3960126409

More Books

Students also viewed these Accounting questions

Question

Create an argument for Freuds greatest legacy ?

Answered: 1 week ago