Task 2: Return, Risk and the Security Market Line wwwwww wwwww Suppose, you have just begun working for an investment firm called Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking to you about the firm's investment portfolio. As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. The company currently holds positions in stocks of Apple, Inc. (FB) and Walmart Inc. (WMT). Covili and Wyatt currently uses a commercial data vendor for information about its wwwww positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked you to do the following assignments. Questions: 7. Using monthly data for the last 73 months estimate the average monthly returns and standard deviations for FB, WMT, Three-month Treasury Bill, and S&P 500. 8. Use the market model to estimate the beta for each of the two stocks (FB and WMT) using the last 72 months risk premiums. Then, estimate the annual required return for each stock based on CAPM using the estimated betas, the average market risk premium and the average risk free rate. 9. If you choose to invest 40% of the funds on FB and the remaining 60% on WMT, what will be the beta and expected return on your portfolio? | Input S&P 500 Annual S&P 500 Date FB price WMT price S&P 500 Risk-free FB Return (R) WMT Return (R) Rate return (Rm) Monthly Risk-free (RF) FB risk WMT risk risk premium premium (R-Rf) (R-Rf) premium (Rm-Rf) 3/1/2014 60.24 65.51 1,872.34 4/1/2014 59.78 68.76 1,883.95 5/1/2014 63.30 66.22 1,923.57 6/1/2014 67.29 65.16 1,960.23 7/1/2014 72.65 63.86 1,930.67 0.0797 8/1/2014 74.82 65.53 2,003.37 0.0299 9/1/2014 79.04 66.81 1,972.29 10/1/2014 74.99 66.63 2,018.05 0.0564 (0.0512) 11/1/2014 77.70 76.48 2,067.56 12/1/2014 78.02 75.03 2,058.90 1/1/2015 75.91 74.66 1,994.99 2/1/2015 78.97 73.74 2,104.50 3/1/2015 82.22 72.26 2,067.89 4/1/2015 78.77 68.98 2,085.51 0.0361 0.0041 (0.0270) 0.0403 0.0412 (0.0420) (0.0076) 0.0496 0.0062 0.0000 0.0589 (0.0369) 0.0210 0.0000 0.0630 (0.0161) 0.0191 0.0000 (0.0198) (0.0151) 0.0000 0.0261 0.0377 0.0000 0.0195 (0.0155) 0.0000 (0.0026) 0.0232 0.0000 0.1478 0.0245 0.0000 (0.0190) (0.0042) 0.0000 (0.0077) 0.0496 0.0062 0.0589 (0.0369) 0.0210 0.0630 (0.0161) 0.0190 0.0796 (0.0199) (0.0151) 0.0298 0.0261 0.0376 5/1/2015 79.19 65.64 2,107.39 0.0053 (0.0050) (0.0310) 0.0000 (0.0124) 0.0549 0.0000 (0.0200) (0.0174) 0.0000 (0.0454) 0.0085 0.0000 (0.0484) 0.0105 0.0000 6/1/2015 85.77 63.08 2,063.11 0.0831 (0.0389) (0.0210) 0.0000 7/1/2015 94.01 64.02 2,103.84 0.0961 8/1/2015 89.73 57.57 1,972.18 (0.0455) 9/1/2015 89.90 58.06 1,920.03 10/1/2015 101.97 11/1/2015 104.24 51.26 52.69 2,079.36 2,080.41 0.0148 0.0197 (0.1007) (0.0626) 0.0019 0.0085 (0.0264) 0.1343 (0.1172) 0.0000 0.0001 0.0000 0.0830 0.0000 0.0223 0.0280 0.0005 0.0001 12/1/2015 104.66 54.89 2,043.94 0.0040 1/1/2016 112.21 59.92 1,940.24 0.0721 2/1/2016 106.92 59.90 1,932.23 3/1/2016 114.10 61.84 2,059.74 4/1/2016 117.58 60.83 5/1/2016 118.81 2,065.30 64.39 2,096.95 6/1/2016 114.28 66.91 2,098.86 7/1/2016 123.94 66.86 2,173.60 0.0845 8/1/2016 126.12 65.46 2,170.95 0.0176 9/1/2016 128.27 66.54 2,168.27 0.0170 10/1/2016 130.99 64.60 2,126.15 0.0212 11/1/2016 118.42 64.98 2,198.81 (0.0960) 12/1/2016 115.05 63.77 2,238.83 (0.0285) 1/1/2017 130.32 62.01 2,278.87 0.1327 2/1/2017 135.54 65.91 2,363.64 0.0401 3/1/2017 142.05 66.98 2,362.72 0.0480 0.0162 4/1/2017 150.25 70.37 2,384.20 0.0577 0.0507 5/1/2017 151.46 73.57 2,411.80 0.0081 6/1/2017 150.98 71.31 2,423.41 (0.0032) 7/1/2017 169.25 75.37 2,470.30 0.1210 8/1/2017 171.97 73.56 2,471.65 0.0161 9/1/2017 170.87 74.09 2,519.36 10/1/2017 180.06 82.79 2,575.26 11/1/2017 177.18 92.19 2,584.84 12/1/2017 176.46 93.64 2,673.61 (0.0041) 0.0156 0.0418 (0.0175) 0.0002 0.0916 (0.0507) 0.0002 (0.0471) (0.0003) (0.0041) 0.0003 0.0672 0.0324 0.0660 0.0002 0.0305 (0.0164) 0.0027 0.0002 0.0105 0.0585 0.0153 0.0002 (0.0381) 0.0392 0.0009 0.0002 (0.0007) 0.0356 0.0003 (0.0210) (0.0012) 0.0003 0.0164 (0.0012) 0.0002 (0.0291) (0.0194) 0.0003 0.0059 0.0342 0.0004 (0.0186) 0.0182 0.0004 (0.0275) 0.0179 0.0004 0.0628 0.0372 0.0004 (0.0004) 0.0006 0.0091 0.0007 0.0455 0.0116 0.0007 (0.0307) 0.0048 0.0008 0.0570 0.0193 0.0009 (0.0240) 0.0005 0.0008 (0.0064) 0.0072 0.0193 0.0009 0.0538 0.1174 0.0222 0.0009 (0.0160) 0.1136 0.0037 0.0010 0.0343 0.0011 0.0564 0.0195 (0.0155) (0.0513) (0.0026) 0.0232 0.0361 0.1477 0.0245 0.0041 (0.0190) (0.0042) (0.0271) (0.0050) (0.0311) 0.0403 (0.0124) 0.0549 0.0411 (0.0200) (0.0174) (0.0420) (0.0454) 0.0085 0.0053 (0.0484) 0.0105 0.0831 (0.0390) (0.0210) 0.0960 0.0148 0.0197 (0.0456) (0.1008) (0.0626) 0.0019 0.0085 (0.0265) 0.1342 (0.1172) 0.0830 0.0222 0.0279 0.0004 0.0038 0.0416 (0.0177) 0.0719 0.0914 (0.0510) (0.0474) (0.0006) (0.0044) 0.0669 0.0322 0.0657 0.0303 (0.0166) 0.0025 0.0102 0.0582 0.0151 (0.0384) 0.0390 0.0843 (0.0009) 0.0354 0.0173 (0.0212) (0.0015) 0.0168 0.0162 (0.0015) 0.0209 (0.0294) (0.0197) (0.0963) 0.0055 0.0338 (0.0289) (0.0190) 0.1323 (0.0279) 0.0175 0.0396 0.0623 0.0368 0.0474 0.0156 0.0571 0.0500 0.0073 0.0447 0.0108 (0.0040) (0.0315) 0.0040 0.1201 0.0561 0.0185 0.0152 (0.0073) 0.0529 0.1165 (0.0170) 0.1126 0.0007 0.0178 (0.0010) 0.0084 (0.0248) (0.0003) 0.0063 0.0184 0.0213 0.0027 1/1/2018 186.89 101.61 2,823.81 0.0591 0.0852 0.0562 0.0012 (0.0052) 0.0145 0.0332 0.0579 0.0840 0.0550 2/1/2018 178.32 85.80 2,713.83 (0.0459) (0.1556) (0.0389) 0.0013 (0.0472) (0.1569) (0.0403) 3/1/2018 159.79 84.81 2,640.87 4/1/2018 172.00 84.82 2,648.05 5/1/2018 191.78 79.15 2,705.27 6/1/2018 194.32 82.65 2,718.37 7/1/2018 172.58 86.10 2,816.29 8/1/2018 175.73 92.50 2,901.52 9/1/2018 164.46 91.14 2,913.98 (0.0641) 10/1/2018 151.79 97.33 2,711.74 11/1/2018 140.61 94.77 2,760.17 12/1/2018 131.09 90.41 2,506.85 1/1/2019 166.69 93.51 2,704.10 2/1/2019 161.45 96.60 2,784.49 3/1/2019 166.69 95.17 2,834.40 4/1/2019 193.40 100.89 2,945.83 (0.1039) (0.0116) (0.0269) 0.0764 0.0002 0.0027 0.1150 (0.0669) 0.0216 0.0132 0.0442 0.0048 (0.1119) 0.0418 0.0360 0.0183 0.0743 0.0303 (0.0147) 0.0043 (0.0770) 0.0678 (0.0694) (0.0737) (0.0262) 0.0179 (0.0677) (0.0461) (0.0918) 0.2716 0.0344 0.0787 (0.0314) 0.0330 0.0297 0.0325 (0.0147) 0.0179 0.1602 0.0601 0.0393 0.0014 (0.1053) (0.0130) (0.0283) 0.0015 0.0749 (0.0013) 0.0013 0.0016 0.0016 0.1134 (0.0685) 0.0201 0.0117 0.0426 0.0016 (0.1135) 0.0402 0.0033 0.0017 0.0018 0.0019 0.0019 0.0344 0.0166 0.0726 0.0286 (0.0659) (0.0164) 0.0025 (0.0789) 0.0660 (0.0713) (0.0756) (0.0282) 0.0159 0.0020 5/1/2019 177.47 99.52 2,752.06 6/1/2019 193.00 108.98 2,941.76 7/1/2019 194.23 108.87 2,980.38 8/1/2019 185.67 112.69 2,926.46 9/1/2019 178.08 117.63 2.976.74 10/1/2019 191.65 118.05 3,037.56 11/1/2019 201.64 118.04 3,140.98 12/1/2019 205.25 117.79 3,230.78 1/1/2020 201.91 2/1/2020 3/1/2020 192.47 166.80 113.99 3,225.52 107.21 2,954.22 113.12 2,584.59 (0.0334) 0.0310 0.0277 0.0305 (0.0167) 0.0159 0.1583 0.0581 0.0373 (0.0824) (0.0136) (0.0658) 0.0020 (0.0843) (0.0156) (0.0677) 0.0875 0.0950 0.0689 0.0018 0.0857 0.0932 0.0671 0.0064 (0.0010) 0.0131 0.0018 0.0046 (0.0027) 0.0114 (0.0441) 0.0352 (0.0181) 0.0016 (0.0457) 0.0335 (0.0197) (0.0409) 0.0438 0.0172 0.0016 (0.0425) 0.0422 0.0156 0.0762 0.0035 0.0204 0.0014 0.0748 0.0022 0.0191 0.0521 (0.0001) 0.0340 0.0013 0.0508 (0.0014) 0.0328 0.0179 (0.0021) 0.0286 0.0013 0.0166 (0.0034) 0.0273 (0.0163) (0.0323) (0.0016) 0.0013 (0.0175) (0.0335) (0.0029) (0.0468) (0.0595) (0.0841) 0.0013 (0.0480) (0.0607) (0.0854) (0.1334) 0.0552 (0.1251) 0.0002 (0.1336) 0.0549 (0.1254) 0.0020 0.0020 0.0020 0.0020 (0.0697) (0.0481) (0.0938) 0.2696 0.0324 0.0767 Output Question 7 Average return Standard deviation FB 0.0165 6.90% WMT 0.90% 5.20% S&P 500 0.52% 3.74% T-Bill 0.08% Please check 0.07% Please check Question 8 FB WMT Beta Expected return Please show how to solve Please show how to solve Question 9 Weight of FB Weight of WMT Portfolio Beta Portfolio Expected return Please show how to solve Please show how to solve Please show how to solve Please show how to solve