Task: (Measuring risk and rates of return):
Question 1: Given the holding-period returns shown here, compute the average returns and the standard deviations for the Zemin Corporation and for the market.
MONTH ZEMIN CORP. MARKET
1 6% 4%
2 3 2
3 -1 1
4 -3 -2
5 5 2
6 0 2
Question 2: If Zemin's beta is 1.54 and the risk-free rate is 8 percent, what would be an appropriate required return for an investor owning Zemin? (Note: Because the returns of Zemin Corporation are based on monthly data, you will need to annualize the returns to make them compatible with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
Question 3: How does Zemin's historical average return compare with the return you believe to be a fair return, given the firm's systematic risk?