Question

Suppose the covariance between the returns of the stock of Poul Inc. and the returns on the Whilshire 5000 is 0.016. If the standard deviation of market returns is 0.011, what is the beta of the stock? Note: Here the actual numbers rather than percentages are given. So give your answer as an actual number rather than a percentage etc.

Question 19 (1 point) Assume that its trade credit terms are 4/10, net 40 and Mackenzie pays on day 40. Using a 365 day year, what is Mackenzie's Effective Annual Rate (EAR) cost of trade credit? Your Answer:

Answer 1

1.

Covariance between the returns of the stock of and the returns on market = 0.016

Variance of market returns = (standard deviation)² = (0.011)²

Hence, Beta = Covariance between the returns of the stock of and the returns on market/Variance of market returns

= 0.016/(0.011)²

= 132.23

2.

4/10 net 40 means that take 4% discount if paid in 10 days, otherwise pay in 40 days

Effective interest rate = Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days))

= (0.04/(1-0.04)) * (360/(40 - 10))

= 0.50 or 50%