Question

(Related to Checkpoint 8.3) (CAPM and expected returns) a. Given the following holding-period retuns, EB, compute the averace returns and the standard deviations for the Sugita Corporation and for the market. f Sugita's beta is 1.46 and the risk-free rate is 9 percent, what would be an expected return for an investor owning Sugita? (Note: Because the preceding returns a 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 Sugita's historical average retun compare with the return you should expect based on the Capital Asset Pricing Model and the firm's sysstematic risk? e based on monthly data, you will need to annualize the returns make % . (Round a. Given the holding-period returns shown in the table, the average monthly return for the Sugita Corporation is three decimal places.) The standard deviation for the Sugita Corporation is%. (Round to two decimal places.) Given the holding-period retums shown in the table, the average monthly return for the market is %. (Round to three decimal places.) The standard deviation for the market is%. (Round to two decimal places.) b. If Sugita's beta is 1.46 and the risk-free rate is 9 percent, the expected return an investor owning Sugita is%. (Round to two decimal places.) The average annual historical return for Sugita is%. (Round to two decimal places.) c. How does Sugita's historical average retun compare with the return you should expect based on the capital asset pricing model and the firm's systematic risk? (Select from the drop-down menu.) Sugita's historical average retum is the return based on the capital asset pricing model and the firm's systematic risk. greater than less than Sugita Corp Month Market 1 2.2% 1.8% 2 -0.8 2.0 3 0.0 1.0 4 0.0 0.0 7,0 5.0 6 7,0 1.0 N L CO

Answer 1

a. i. Average Monthly Return for Sugita = 2.567%

ii. Standard Deviation for Sugita = 7.99 or 8%

iii. Average Monthly Return for Market = 1.8%

iv. Standard Deviation for Market = 3.847 or 3.85%

b. Expected Return for an investor using CAPM = 27.396%

c. Historical Return is Greater than CAPM Return.

For detailed workings, please refer the images below.

Average Manly Relurn = 1elal Retuen 9.2 + (-0-8) +0+0+7+7 IS.4 No mortu 9.s11 Syin losporation 9.5 u)Standard deuiation GR-AR) wthere GR peind Criuon Retuun, AR = Refuen Avecge GR-AR GR AR 2.9 0 1369 -0.37 9.57 2 -3 37 (1.3569 -0-8 2.57 2 6.6049 9.ST 2-ST C QST 6 6049 2.57 4.43 (9.6249 9.57 4.43 14. 6249 Ed2 63.9534 7. 99 eL 8 63.9534 Aveaage Mmthly Retuu foe the naket 1.8+ +1+0+ 5+1 1o.80 1.8 N) Standard deuation et naeket N14.80 3.847 et 3 85 d GR-AR AR GR 1.8 0.2 O.D4 0 64 1 8 -D 8 1.8 - 1.8 3.24 18 3.2 t0.24 8 8 -D.8 14.80 - o D - 5い

Mouthly aueege Rehuu for y Supn Yeay avenge ctuu B (Rm-Rf) 9:57 9.567 x12 30- 804 CAPM Reluen + Risk Free t Retu wheue Rm Market R Retuen monthly aueage ecteu fmauket eady Retuu 1.8% T1X8.1 |2161 CAP m Retuen 9.46 (21.6-9) .396 Sugle' histeei cal aueafe Retuen 30-804 Capidal Ascet Expected Reluen baeed 27.396% pritng nuodle aud hs Aydatic ek Hence, Supila histoefcal averafe retuu ieat an ping the retuen baaed ondue nodel and capila anet the fioms yetemalic isk