Question

Beta Price, 03/2012 Price 03/2013 1400 1560 73 S&P 500 Index Heinz (HNZ) Las Vegas Sands (LVS) Colgate (CL) Standard Deviation 14.01% 15.7% 35.5% 18.2% 0.53 3.65 0.45 54 114 96 (a) Explain why the beta estimates make sense intuitively. Hint! Why does LVS have a high beta? etc. Assume the CAPM is correct. How should you invest? Do you need more information to answer this question? (c) Which stock has the highest expected return according to the CAPM? Why? Plot all the stocks and the S&P on the SML. The risk free rate is 2% and the expected return on the market is 10% Consider a portfolio that allocates 25%, 40% and 35% to HNZ, LVS and CL respectively. What is the beta of this portfolio? What is the expected return (use the CAPM)? What is the expected return on the portfolio in (d) using historical information instead of the CAPM? CL has a higher standard deviation than HNZ. Is this consistent with the CAPM? Why or why not?

Answer 1

The handwritten note attached as images, along with that (D)'s answer is pasted in table.

Name	Price 03/2012	Price 03/2013	Diff of price	Allocation	Beta	Allocated Investment	Expected ROI that too with Beta	Return Compare to last price
					Invested amount	$100,000
S&p	1400	1560	160		1			11.4286%
Heinz	53	73	20	25	0.53	$25,000	$13,250	37.7358%
LVS	52	54	2	40	3.65	$40,000	$146,000	3.8462%
CL	96	114	18	35	0.45	$35,000	$15,750	18.7500% Answers (a) Beta measures the particuleen stock risks which are in velection to the overall mourket. Letus, understand the bera with the help of a chart: A Betch 2.5 Beta 1.0 Retwen on Stock Over the risk free retfern >Bera 0.5 Return over merket пък 2 ее гох lection of Lower the bera lower the riskon that stock. Higher the beta highee the risk on that stock. Неее, LVS represents the higher risk as the Beter is highes and the stock is more volatile as compared to the others. while assuming the CAPM is correct, any tre information available with us..we should in nest accordingly, with relectican to the Betel. 1) Heinz (HN2) - This stock heis to lowers beter which I means that rusk associated with this stock is very low, and is check the past. Performance then the eveton on invested sowity is higher as compare to otever Stocks 2) colgate (CL)! This stock is having the lowest Bela awy tue weten on equiry stock is second highest in this category. 3) S&P 500 Index :- This stock hes the thind priority for the investment es the Bera is higher as compare to HNZ & Cl. cud in terms of return helving lours ces compare to both HN ZRCL- 4) kes Vegas Sands (LVS); for this stock, we will give least Priority of the stock is more volatile and the past performance and wetwan care very lowest as compare to the other stocks. using security market line (SML) the stock which has the highest Expected evetwen as follows: Ivs २०500 HAZ Expected everon on CL Talubrou Rish free neve formula for calculating the expected overom expected Retran - Riskfrice Rate + {Bera of security X (exp. market retours - Riskifree Reak] - S&P 500 Index = 2 + {2.0 (10-2)} - 2t {8.0} = 10 - HNZ = = 2 + {0-53(10-2) = 2+ 4.24 - 6.24% - LVS : 2+{3.65 (10-2)} = 2 + 29.2 = 31.27. -CL = 2 + {0.45 (10-278 = 2+3.6 = 5.6% d) If we compare the Historical method as compare to the CAPM then the average of the Expeared retuin takes into cconsideration for tere eraillarian of the stocks so as to derive the value the historical method tue CAPM method is differs. (1) The Highes Standard Deviation of cc is indicates that tue Colgate has the more spreeld our data as compare to the HNZ. The Higher the spread out dotes the higher the standard devictian. SD is inversely correlated with the Bete. the lower the Bere the righer the standend deviction. The higher the SD of stocks the higher the variance between each price and the means. which shows the wides stock price Reenge.