FIN 534 – Homework Set #3
Goodman Industries
Year Capital Gain Dividend Annual Return
+ Capital Gain
2013 3.75 5.48 24.76%
2012 (2.62) (1.03) -4.16%
2011 8.62 10.12 62.74%
2010 (0.93) 0.50 2.93%
2009 5.62 6.97 60.93%
2008 -0- -0- -0-
So the average annual return would be 29.4%
Landry Incorporated
(5.32) (0.82) -1.05%
5.32 9.67 13.22
(12.75) (8.62) -10.04%
(4.12) (0.37) -0.41%
6.37 9.75 11.66%
The average annual return is 2.7%
Market Index return Annual Return
4.32 32.80%
0.16 1.23%
3.36 34.82%
1.25 14.88%
1.35 19.15%
-0- -0-
The average annual return is 20.6%
2. The standard deviations of Returns for
Goodman: 31.4%
Landry: 9.7%
Market Index: 13.8%
These answers were calculated by using Excel’s STDEV.S function, which is as follows:
The stock values given were put into column A. The formula =STDEV (A: A), was then entered in the first cell of column B.
3. When estimating Goodman’s and Landry’s betas using the Excel’s Slope function the results were:
Goodman = 1.54 and Landry = -0.56, which were both consistent with the graph when putting the stock return on the vertical axis (y) and the market return on the horizontal axis (x).
4. When calculating the required return on the market using the SML equation, you would simply add the risk-free rate on long-term Treasury bond (6.04%) to the market risk premium (5%) to give you 11.04%.
5. If a portfolio was formed with 50% being Goodman and the other 50% being Landry, the outcome would be:
1.54 = Beta for Goodman
0.56 = Beta for Landry
The beta is calculated by Beta = (Covariance of Stock return and Market return)/Variance of Market return. Covariance = Correlation x Standard deviation of Stock x Standard deviation of Market.
The rate of return for Goodman would be: 13.74
And for Landry the rate of return would be: 3.24
The required return of stock = Risk free rate + Beta...