you have run the following regression of a single-index model for
stock A, in excess monthly returns.
- In Implementing The Treynor Black Model For Your Group Project You Have Run The Following Regression Of A Single Index 1 (48.64 KiB) Viewed 35 times
1%. The correlation coefficient between stock return and market
return is 0.6.
Required:
(1) From the regression output, identify the stock’s
beta and alpha. [3 Marks]
(2) Calculate M2 and determine whether stock A
outperformed the market? [4 Marks]
(3) If the intrinsic value of stock A is estimated to be
$21, while its current stock price is $20,
what would be your estimate of expected return E(r) for stock A?
Can you use the alpha
estimate from the regression? Explain. [6 Marks]
(4) If you form an equally weighted portfolio
(P) with stock A and TraHK Fund, what would
be beta and expected return of the portfolio? [4 Marks]
(5) Show that the above portfolio P is better than
investing 100% in stock A? [4 Marks]
(6) Suppose there is a call option on stock A, if the
standard deviation of the stock return
increases, what would you expect the impact on stock price and
call option price? Explain. [4 Marks]
Regression Statistics R Square 0.36 Standard Error 9.24% Observations 120 Standard Error Coefficients t Stat 0.31 1.64 Intercept RM 0.51% 1.20 0.16 7.50 You also observe the following statistics of historical returns. Average Return Standard Deviation Risk-free Rate 2% 0% Stock A 30% 40% TraHK Fund (M) 12% 20%