Data on weekly stock prices for microsoft corporation exxon


Data on weekly stock prices for Microsoft Corporation, Exxon Mobil Corporation and the S&P 500 Index were used to compute the following historical volatility and expected return. Using these results, answer the following questions: The historical returns volatility (standard deviation of returns) at an annualized rate for each stock are: MSFT= 0.182, XOM= 0.120 and S&P500 = 0.108. The expected return for each stock and the index at an annual rate for MSFT, XOM and S&P500 is respectively: 0.136 0.308 0.105 a. Using the computed beta of 0.997 for MSFT and 0.508 for XOM and expected return for each stock and the S&P 500 index over the past year, draw the Securities Market Line (SML) using a risk-free rate of 5.37 percent based on the 3-month Libor rate at the time. Do each of the stocks fall on the SML? Analyze their relative position and which stock is the best buy and why. HINT: Use the average return of the S&P 500 stock index provided above as the expected return for the market. b. Using the data in above and in a. and assuming the average return on the S&P 500 index is a representation of market expected return and risk, compute the slope of the Capital Market Line (CML) when the risk-free rate is approximated by the Libor rate given in a. From your results, what is the market price of risk?

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Financial Management: Data on weekly stock prices for microsoft corporation exxon
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