Reference no: EM132705338

You want to take advantage of the recent results of the R&D process of Walgreens and MedMedica in the race for the COVID-19 vaccine. Walgreens stock is X and MedMedica stock is Y.

The following information has been provided by your advisor,

Expected returns of X= E(RX)=20%; Expected Returns of Y=E(RY)= -5%.; the Standard Deviation of the returns of X=STD(RX)=29.5% and the standard deviation of the returns of Y=STD(RY)=18.20%. The covariance of X and Y is -24.50%. You have $ 1,000,000 that would like to invest, but you will borrow another $ 1,000,000 and plan to invest in 150% of your capital in X and the rest in Y. The Standard and Poors (S&P) standard deviation is 24%. In addition, the covariance of the returns of the S&P and X is 18% and the covariance of the returns of the S&P and Y is 36%.

Required:

a. What return do you expect to generate on this portfolio?

b. What are the Betas of X and Y?

c. Determine the correlation between X and Y. Does the result make sense, why?

d. Assuming that the actual return on X was 48% and for Y was 12%. Using these results, what does CPAM tell us about the compensation for risk.

Note: you must support your argument with numbers.

e. Other factors constant, and based on the information provided, which of the two companies should have a higher cost of equity? Explain thoroughly.