FINANCE
8-22 (Evaluating Risk and Return) Bartman Industries’ and Reynolds Inc stock prices and dividends, along with the Winslow 5000 Index are shown here for the period of 2005-2010. The Winslow 5000 data are adjusted to include dividends.
Bartman Industries Reynolds Inc. Winslow 5000
Year Stock Price Dividend Stock Price Dividend Includes Dividends
2010 $17.250 $1.15 $48.750 $3.00 $11,663.98
2009 14.750 1.06 52.300 2.90 8,785.70
2008 16.500 1.00 48.750 2.75 8,679.98
2007 10.750 .95 57.250 2.50 6434.03
2006 11.375 .90 60.000 2.25 5,602.28
2005 7.625 .85 55.750 2.00 4,705.97
a. Use the data to calculate the rate of return for Bartman Industries, Reynolds Inc, 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 end price to get 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 2005 because you do not have 2004 data).
b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000.
c. Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000.
d. Construct a scatter diagram that shows Bartmans’ and Reynolds’ returns on the vertical axis and Winslow 5000 Index’s returns on the horizontal axis.
e. Estimate Bartmans’ and Reynolds’ betas by running regressions of their returns against the Index’s returns. Are the betas consistent with your graph?
f. Assume that the risk-free rate on a long-term Treasury bonds is 6.04%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the markets 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.
g. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolio’s beta and required return be?
h. Suppose and investor wants to include Bartman Industries’ stock in his portfolio. Stocks A, B, and C are currently in the portfolio; and their betas are at 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio’s required return if it consist of 25% of Bartman, 15% stock A, 40% of stock B, and 20% of stock C.
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