Question: a. Calculate the annual rate of return for each asset in each of the 10 preceding years, and use those values to find out the average annual return for each asset over the 10-year period.
b. Use the returns calculated in part (a) to find
(1) the standard deviation and
(2) the coefficient of variation of the returns for each asset over the 10-year period 2003-2012.
c. Use your findings in parts (a) and (b) to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain.
d. Use the CAPM to find the required return for each asset. Compare this value with the average annual return calculated in part (a).
e. Compare and contrast your findings in parts (c) and (d). What recommendations would you give Junior with regard to investing in either of the two assets? Explain to Junior why he is better off using beta rather than the standard deviation and coefficient of variation to assess the risk of each asset.
f. Rework parts (d) and (e) under each of the following circumstances:
(1) A rise of 1.0% in inflationary expectations causes the risk-free rate to rise to 8.0% and the market return rise to 11.0%.
(2) As a result of favorable political events, investors suddenly become less risk-averse, causing the market to drop by 1.0%, to 9.0%.