Price, 03/2012Price 03/2013BetaStandard DeviationS&P 500 Index140015601.014.01%Heinz…

Price, 03/2012Price 03/2013BetaStandard DeviationS&P 500 Index140015601.014.01%Heinz (HNZ)53730.5315.7%Las Vegas Sands (LVS)52543.6535.5%Colgate (CL)961140.4518.2%(a) Explain why the beta estimates make sense intuitively. Why would LVS have a high beta? etc. (b) Assume the CAPM holds. How should you invest?(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%.(d) 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 standard deviation?(e) What is the expected return on the portfolio in (d) using historical information instead of the CAPM?(f) CL has a higher standard deviation than HNZ. Is this consistent with the CAPM? Why or why not?

 

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