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Objective: Investigate the relationship between risks and returns.

Mindset: Understand the relationship between risk and returns.

Instructions

Managers must determine a stock’s relative risk to the market with the understanding of the relative risk of a particular stock in relationship to the market.

Write a 1-page double spaced paper responding to the Mini Case at the end of Chapter 2 titled “Cicero Services.” In your response be sure you cover all parts of Questions A, C, and D.

2–15 Evaluating Risk and Return Start with the partial model in the file Ch02 P15 Build a Model.xls on the textbook’s Web site. The file contains hypothetical data for working this problem. Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. (I will send the data chart once my writer has been picked)

a. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns are calculated by subtract- ing the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2010 be- cause you do not have 2009 data.)

b. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

d. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your graph?

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