BKM Ch 10 Answers w CFA

1.      You have regressed the monthly returns of stocks XXX and YYY on the historic market risk-premium (R_M), the return on the dollar relative to the euro and found the following results:

Assume both are U.S. based companies and neither company hedges it currency risk.  Which company imports from Europe and which company exports to Europe?

1. No assume you compared this actively-managed portfolio to an index portfolio of small growth stocks (in which you can invest for free) and found the average excess monthly return equal to 0.30% and the Tracking error equal to 0.20%.  Calculate the Information Ratio.  What does the information ratio tell us?
2. Did this portfolio earn a risk-adjusted abnormal (or excess) return?
3. What is the equity “style” of the portfolio? 

2.      You have regressed the monthly returns of an actively managed general equityportfolio on the historic market risk-premium (R_M), the small stock premium (SMB) and the value stock premium (HML) and found the following results:

The Realized return on the market = 7.00%

To what can the unexpected component of the realized stock return be attributed?

Realized return on wheat = -6.00%. 

a.      Now it is the end of the year.  The realized return on the stock = 15.00%. 

b.      Calculate the expected return on the stock.

r_f = 1.00%. 

E(r_M) = 10.00%    E(r_W) = 5.00%

β_M = 1.50               β_Wheat = -0.25(Is this a farm-related stock or a baking company stock?)

3.      It is the beginning of the year and using the past data you have estimated the following:

1. Now it is the end of the year and the realized return on the stock is 11.00%.  The realized return on the market is 9.20% and the realized return on oil is -2.00%.  To what can the unexpected component of the realized stock return be attributed?

4.      It is the beginning of the year and using the past data you have estimated a stock’s market beta is 1.2 and its beta relative to the return on oil is -0.3.  The expected return on the market over the next year is 8.5% and the expected return on oil is 3%.  The risk-free rate is 0.50%. 

1. Calculate the expected return on the stock.