I been trying to figure this out need help with the formulas and answers
Note: Although not absolutely necessary you are advised to use a computer spreadsheet to work the following problem.
a. Use the price data from the table that follows for the Standard & Poor%u2019s 500 Index Walmart and Target to calculate the holding-period returns for
the 24 months from July 2007 through June 2009.184
MONTH S&P 500 WALMART TARGET
Jun-07 1503.35 46.32 61.86
Jul-07 1455.27 44.24 58.91
Aug-07 1473.99 42.22 64.28
Sep-07 1526.75 42.24 61.98
Oct-07 1549.38 43.75 59.83
Nov-07 1481.14 46.35 58.62
Dec-07 1468.36 46.20 48.88
Jan-08 1378.55 49.32 54.17
Feb-08 1330.63 48.21 51.56
Mar-08 1322.70 51.45 49.67
Apr-08 1385.59 56.63 52.07
May-08 1400.38 56.63 52.43
Jun-08 1280.00 55.12 45.68
Jul-08 1267.38 57.50 44.44
Aug-08 1282.83 58.17 52.26
Sep-08 1164.74 58.98 48.35
Oct-08 968.75 54.96 39.54
Nov-08 896.24 55.03 33.44
Dec-08 903.25 55.45 34.21
Jan-09 825.88 46.60 30.91
Feb-09 735.09 48.70 28.20
Mar-09 797.87 51.82 34.25
Apr-09 872.81 50.13 41.10
May-09 919.14 49.74 39.30
June-09 946.21 48.68 39.00
Calculate the average monthly holding-period returns and the standard deviation of these returns for the S&P 500 Index Walmart and Target.
c. Plot (1) the holding-period returns for Walmart against the Standard & Poor%u2019s 500 Index and (2) the Target holding-period returns against the
Standard & Poor%u2019s 500 Index. (Use Figure 6-5 as the format for your graph.)
d. From your graphs in part c describe the nature of the relationship between the stock returns for Walmart and the returns for the S&P 500 Index. Make
the same comparison for Target.
e. Assume that you have decided to invest one-half of your money in Walmart and the remainder in Target. Calculate the monthly holding-period returns for your
two-stock portfolio. (Hint:The monthly return for the portfolio is the average of the two stocks%u2019 monthly returns.)
f. Plot the returns of your two-stock portfolio against the Standard & Poor%u2019s 500 Index as you did for the individual stocks in part c. How does this
graph compare to the graphs for the individual stocks? Explain the difference.
g. The following table shows the returns on an annualized basis that were realized from holding long-term government bonds for the same period. Calculate the
average monthly holding- period returns and the standard deviations of these returns. (Hint: You will need to convert the annual returns to monthly returns by
dividing each return by 12 months.)
MONTH AND YEAR ANNUALIZED RATE OF RETURN (%)
h. Now assuming that you have decided to invest equal amounts of money in Walmart Target and long-term government securities calculate the monthly returns
for your three asset portfolio. What is the average return and the standard deviation?
i. Make a comparison of the average returns and the standard deviations for all the individual assets and the two portfolios that we designed. What conclusions
can be reached by your comparison?
j. According to Standard & Poor%u2019s the betas for Walmart and Target are 0.59 and 1.02 respectively. Compare the meaning of these betas relative to
the standard deviations calculated above.
k. Assume that the current treasury bill rate is 4.5 percent and that the expected market return is 10 percent. Given the betas for Walmart and Target in part
j estimate an appropriate rate of return for the two firms.