Estimate of the markets required return-it is too high

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Reference no: EM133432622

Question: Bartman Industries and Reynolds Inc.'s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2015-2020. The Winslow 5000 data are adjusted to include dividends.

	Bartman Industries		Reynolds Inc.		Winslow 5000
Year	Stock Price	Dividend	Stock Price	Dividend	Includes Dividends
2020	$16.85	$1.11	$49.75	$2.65	$11,323.77
2019	14.55	1.01	53.70	2.55	8,694.26
2018	16.25	0.95	49.75	2.45	8,590.00
2017	10.65	0.90	59.75	2.30	6,443.45
2016	11.32	0.85	62.90	2.10	5,627.29
2015	7.52	0.80	58.05	1.85	4,738.15

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any.

A- Use the data to calculate annual rates of return for Bartman, Reynolds, 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 ending price to get the 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 2015 because you do not have 2014 data.) Round your answers to two decimal places.

Year	Bartman Industries	Reynolds Inc.	Winslow 5000
2020
2019
2018
2017
2016
Average

B- Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. (Hint: Use the sample standard deviation formula, which corresponds to the STDEV.S function in Excel.) Round your answers to two decimal places.

	Bartman Industries		Reynolds Inc.		Winslow 5000
Standard deviation

C- Calculate the coefficients of variation for Bartman, Reynolds, and the Winslow 5000. Round your answers to two decimal places.

	Bartman Industries		Reynolds Inc.		Winslow 5000
Coefficient of variation

D- Assume the risk-free rate during this time was 3%. Calculate the Sharpe ratios for Bartman, Reynolds, and the Index over this period using their average returns. Round your answers to four decimal places.

	Bartman Industries		Reynolds Inc.		Winslow 5000
Sharpe ratio

E- Estimate Bartman's and Reynolds's betas by running regressions of their returns against the index's returns. Round your answers to four decimal places.

Bartman's beta:

Reynolds's beta:

F- Assume that the risk-free rate on long-term Treasury bonds is 4.5%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market's required return-it is too high. So use 9% as the expected return on the market. Use the SML equation to calculate the two companies' required returns. Round your answers to two decimal places.

Bartman's required return:

Reynolds's required return:

G- If you formed a portfolio comprising 50% Bartman and 50% Reynolds, what would the portfolio's beta and required return be? Round your answer for the portfolio's beta to four decimal places and for the portfolio's required return to two decimal places.

Portfolio's beta:

Portfolio's required return:

H- Suppose an investor wants to include Bartman Industries's stock in his portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.814, 0.976, and 1.389, respectively. Calculate the new portfolio required to return if it consists of 25% of Bartman, 10% of Stock A, 40% of Stock B, and 25% of Stock C. Round your answer to two decimal places.

fill in the blank %

Reference no: EM133432622

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