You have run a regression of monthly stock returns for Gym Place Holdings, a small play-set manufacturing company against the S&P 500 over the last 5 years. The results are summarized below:

ReturnsGym Place = 0.0005 + 2.00 Returns S&P 500 R2 = 0.5, the standard error for the beta estimate is 0.4

If you know that this stock had a monthly Jensens alpha of 0.002 during the period of the regression. The 10-year U.S. treasury bond rate is 0.049, the German government Euro bond rate is 0.054 and Gym Place can borrow money at 0.06 (in Euros). The risk premium (Equity over risk free rate) over the last 10 years in European markets is only 0.02 but the historical risk premium over the last 75 years in the United States is 0.0453.

Using Jensens alpha, What was the monthly risk free rate ?

Answer for part 1

What was the annualized risk free rate during the last 5 years?

Answer for part 2

What is the upper bound in a 95 confidence interval for beta estimate?

Answer for part 3

What is the lower bound in a 95 confidence interval for beta estimate?

Answer for part 4

What is the firm specific risk?

Answer for part 5

What is the market risk?

Answer for part 6

Estimate a Euro cost of equity for Gym Place Holdings

Answer for part 7

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