finance

9.1 How do lending (borrowing) possibilities change the Markowitz model?

9.4 What is the market portfolio?

9.7 How can we measure a security’s contribution to the risk of the market portfolio?

9.10 What are the difficulties involved in estimating a security’s beta?

9.13 What is “the law of one price”?

9.21 What is a factor model?

9.25 How can APT be used in investment decisions?

Spreadsheet Exercises

9.1 Assume that the annual price data below is for General Foods and a broad stock market index, covering the period 2003–2018. Calculate the beta for General Foods. Use the ESTLIN function or the SLOPE function in the spreadsheet.

Year	GF	S&P
2018	40.58	1,211.92
2017	48.38	1,111.92
2016	40.96	879.82
2015	43.34	1,148.08
2014	55.38	1,320.28
2013	52.26	1,469.25
2012	59.49	1,229.23
2011	58.72	970.43
2010	45.93	740.74
2009	32.06	615.93
2008	21.93	459.27
2007	18.67	466.45
2006	17.24	435.71
2005	16.3	417.09
2004	9.29	330.22
2003	7.57	353.4

9.2 Given the information below, calculate the portfolio beta and the expected return on this two-stock portfolio using the CAPM.

If the weights were 50/50, would this increase or decrease the portfolio return?

If the market’s expected return had been 8 percent with the 60/40 weights, would this increase or decrease the portfolio return?

Market’s Expected Return	9%
Risk-Free Rate	2.50%
Beta for Bateman Industries	0.98
Beta for Advanced Solar Arrays	1.34
Weight for Bateman	60%
Weight for Solar Arrays	40%
Portfolio Beta
Expected Return on the Portfolio