Please answer each part fully with formulas and explanations. with steps. You have collected...
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Finance
Please answer each part fully with formulas and explanations. with steps.
You have collected returns on AnaDone Corporation (AD Corp.), a large, diversified manufacturing firm, and the NYSE index for five years:
Year AD Corp. NYSE
1981
10%
5%
1982
5%
15%
1983
-5%
8%
1984
20%
12%
1985
-5%
-5%
a. Estimate the intercept (alpha) and slope (beta) of the regression.
b. If you bought stock in AD Corp. today, how much would you expect to make as a return over the next year? (The six-month T-bill rate is 6%.)
c. Looking back over the past five years, how would you evaluate AD Corp.'s performance relative to the market?
d. Assume now that you are an undiversified investor and that you have all of your money invested in AD Corp. What would be a good measure of the risk that you are taking on? How much of this risk would you be able to eliminate if you diversify?
e. AD Corp. is planning to sell off one of its divisions. The division under consideration has assets that comprise half of the book value of AD Corp. and 20% of the market value. Its beta is twice the average beta for AD Corp. (before di-vestment). What will the beta of AD Corp. be after divesting this division?
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