The attached file contains hypothetical data for working on this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported on December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends.

1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average returns over the five-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 return for 2015 because you do not have 2014 data.)
2. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)
3. On a stand-alone basis which corporation is the least risky?
4. Construct a scatter diagram graph that shows Goodman’s and Landry’s returns on the vertical axis and the Market Index’s returns on the horizontal axis.
5. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock returns on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: use Excel’s SLOPE function.) Are these betas consistent with your graph?
6. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.
7. If you formed a portfolio that consisted of 60% Goodman stock and 40% Landry stock, what would be its beta and its required return?
8. Suppose an investor wants to include Goodman Industries’ stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio’s required return if it consists of 30% of Goodman, 20% of Stock A, 30% of Stock B, and 20% of Stock C.
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a. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average returns over the five-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 return for 2015 because you do not have 2014 data.) Data as given in the problem are shown below: Goodman Industries Stock Price $30.32 $23.53 $28.61 $15.21 Year 2020 2019 2018 2017 2016 2015 Average 2020 2019 $12.63 $13.21 We now calculate the rates of retum for the two companies and the index: 2018 2017 2016 Goodman Dividend $2.23 $2.65 $2.73 $2.57 $2.23 $2.25 Landry Standard deviation of returns Landry Incorporated Stock Price $85.12 $79.32 $74.32 $87.12 $95.12 $84.25 Index Goodman Market Index Dividend Includes Divs. $3.52 18,475.97 $3.65 12,174.55 12,019.97 10,743.05 9,455.42 8,163.96 Note: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx. Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Goodman and then copy the cell for the other items. $3.45 $3.47 b. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.) Use the function wizard to calculate the standard deviations. Landry $3.55 $3.25 Index