1. An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk free rate of return is %, the expected return rate on the first factor (r1) is 12%, and the expected return on the second factor (r2)is 8%. If bi1=0.7, and bi2= 0.9, what is Crisp’s required return? Show your work
2.The data is as follows:
Year: 1 NYSE: 4.0% Stock Y: 3.0%
Years: 2 NYSE: 14.3% Stock Y: 18.2%
Years: 3 NYSE: 19.0% Stock Y: 9.1%
Years: 4 NYSE: -14.7% Stock Y: -6.0%
Year: 5 NYSE: -26.5% Stock Y: -15.3%
Year: 6 NYSE: 37.2% Stock Y: 33.1%
Year: 7 NYSE: 23.8% Stock y: 6.1%
Year: 8 NYSE:-7.2% Stock y:3.2%
Year: 9 NYSE: 6.6% Stock Y: 14.8%
Year: 10 NYSE: 20.5% Stock Y: 24.1%
Year: 11 NYSE:30.6% Stock Y: 18.0%
Mean=NYSE 9.8% and Stock Y 9.8%
Beta= NYSE 19.6% and Stock Y 13.8%
1. Construct a scatter diagram showing the relationship between returns of Stock Y and the market. Use a spreadsheet to a calculator with a linear regression function to estimate beta.
2. Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y’s volatility and relative risk as compared with those of other stocks.
3. Suppose the regression line were exactly as shown by your graph from part b but the scatter points were more spread out. How would this affect (1) the firms risk if the stock is held in a one asset portfolio and (2) the actual risk premium of the stock if the CAPM holds exactly?
4. Suppose the regression line were downward slopping and the beta coefficient were negative. What would this imply about (1) stock Y’s relative risk and (2) the correlation with the market and (3) its probable risk premium?