rk9%20%233.pdf 8-22 EVALUATING RISK AND RETURN dividends, along with the Winslow 5000 Index, are shown here for the period The Winslow 5000 data are adjusted to include dividends Bartman Industries' and Reynolds Inc.'s stock prices and Bartman Industries Reynolds Inc. Winslow 5000 Year Stock Price Dividend Stock Price Dividend Includes Dividends 2013 1725 1.15$4875$300 2012 2011 2010 2009 2008 14.75 16.50 10.75 11.37 7.62 11,663.98 8,785.70 8,679.98 6,434.03 5,602.28 4,705.97 1.06 1.00 0.95 0.90 0.85 52.30 48.75 5725 2.75 2.50 225 2.00 55.75 a. Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index. Then calculate each entity's average return over the 5-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of retum for 2008 because you do not have 2007 data.) Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, Equation 8.2a in this chapter, which corresponds to the STDEV function in Excel.) b. c Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000. d. Construct a scatter diagram that shows Bartman's and Reynolds' returns on the vertical axis and the Winslow 5000 Index's returns on the horizontal axis Estimate Bartman's and Reynolds' betas by running regressions of their returns against the index's returns. (Hint Refer to Web Appendix 8A.) Are these betas consistent with your graph? Assume that the risk-free rate on long-term Treasury bonds is 604% Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market's required return-it is too high. So use 11% as the expected return on the market. Use the SML equation to calculate the two companies' required returns If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what e. g. would the portfolio's beta and required return be? Suppose an investor wants to include Bartman Industries' stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are 0.769, 0.985, and h. 1423, respectively. Calculate the new portfolios required return if it consists of 25% of Bartman, 15% of Stock A, 40% of Stock B, and 20% of Stock C rk9%20%233.pdf 8-22 EVALUATING RISK AND RETURN dividends, along with the Winslow 5000 Index, are shown here for the period The Winslow 5000 data are adjusted to include dividends Bartman Industries' and Reynolds Inc.'s stock prices and Bartman Industries Reynolds Inc. Winslow 5000 Year Stock Price Dividend Stock Price Dividend Includes Dividends 2013 1725 1.15$4875$300 2012 2011 2010 2009 2008 14.75 16.50 10.75 11.37 7.62 11,663.98 8,785.70 8,679.98 6,434.03 5,602.28 4,705.97 1.06 1.00 0.95 0.90 0.85 52.30 48.75 5725 2.75 2.50 225 2.00 55.75 a. Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index. Then calculate each entity's average return over the 5-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of retum for 2008 because you do not have 2007 data.) Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, Equation 8.2a in this chapter, which corresponds to the STDEV function in Excel.) b. c Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000. d. Construct a scatter diagram that shows Bartman's and Reynolds' returns on the vertical axis and the Winslow 5000 Index's returns on the horizontal axis Estimate Bartman's and Reynolds' betas by running regressions of their returns against the index's returns. (Hint Refer to Web Appendix 8A.) Are these betas consistent with your graph? Assume that the risk-free rate on long-term Treasury bonds is 604% Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market's required return-it is too high. So use 11% as the expected return on the market. Use the SML equation to calculate the two companies' required returns If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what e. g. would the portfolio's beta and required return be? Suppose an investor wants to include Bartman Industries' stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are 0.769, 0.985, and h. 1423, respectively. Calculate the new portfolios required return if it consists of 25% of Bartman, 15% of Stock A, 40% of Stock B, and 20% of Stock C