Question

a.  Given the following​ holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market.

b.  If​ Zemin's beta is 1.98 and the​ risk-free rate is 7 ​percent, what would be an expected return for an investor owning​ Zemin? ​ (Note: Because the preceding returns are based on monthly​ data, you will need to annualize the returns to make them comparable with the​ risk-free rate. For​ simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by​ 12.)

c.  How does​ Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the​ firm's systematic​ risk?

(CAPM and expected returns) a. Given the following holding-period returns, compute the average retums and the standard deviations for the Zemin Corporation and for the market b. If Zemin's beta is 1.98 and the risk-free rate is 7 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them Domparable with the risk-free rate. For simplicity. you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.) c. How does Zemin's historical average return compare with the retum you believe you should expect based on the capital asset pricing model and the firm's systematic risk? a. Given the hokding-period returns shown in the table, the average monthly return for the Zernin Corporation is%. (Round to two decimal places.) iData Table Zemin Corp. Month Market 7% 1 6% 2 3 4. 5 6 Print Done Enter your answer in the answer box and then click Check Answer.

Answer 1

Answer for Part 1:

A) Average return = sum of holding period returns/number of months

For Zemin = (7+2+2-1+4+3)/6=2.83%

For the market = (6+4+1-3+4+4)/6=2.67%

Standard deviation = {(return in month t – average return)2 + {return on month n – average return)2}1/2
No. of months -1 no. of months -1

For Zemin = {(7-2.83)/5) 2 + (2 – 2.83)/5) 2 + (2-2.83)/5)2 + (-1-2.83)/5)2 + (4-2.83)/5)2+(3-2.83)/5)2 }1/2
= {0.69 + 0.03 + 0.03 + 0.13 + 0.59+0.00}1/2
= {1.47]1/2
= 1.21

For the market = {(6-2.67)/5) 2 + (4-2.67)/5)2 + (1-2.67)/5)2 + (-3-2.67)/5)2 + (4-2.67)/5)2 + (4-2.67)/5)2}1/2
= {0.44 + 0.07 + 0.11 + 1.28 + 0.07 + 0.07}1/2
= { 2.04}1/2
= 1.43

Answer for Part 2:

B) K j = k r f + ß j (k m – k r f) where
K j = the required rate of return.
K r f = the risk free rate.
? j = beta
K m = expected return for the market.
Monthly market rate = 2.67%
Annual market rate = 2.67 × 12 = 32.04%
K j = 7 + 1.98(32.04 – 7)
= 56.57%