Calculate the monthly holding-returns for Citigroup and the S and P 500 index. W

Question

Calculate the monthly holding-returns for Citigroup and the S and P 500 index. What are the average monthly returns and standard deviation for each? Graph the Citigroup returns and standard deviations for each? Use a spreadsheet to compute the slope of the characteristic line. Interpret your findings. (security market line) Determine the expected return and beta for the following portfolio: given the foregoing information, draw the security market line and show where the securities and portfolio fit on the graph. Assume that the risk-free rate is 2 percent and that the expected on the market portfolio is 8 percent. How would you interpret these findings?

Explanation / Answer

a) Calculation of Expected Return Expected Return = Prob. 1 * Return 1 + Prob. 2 * Return 2 + Prob. 3 * Return 3                                =.4*.12 + .25*.11 + .35*.15                                =12.8% Beta = Prob. 1 * Beta 1 + Prob. 2 * Beta 2 + Prob. 3 * Beta 3           =.4* 1 + .25*.75 + .35*1.3           =1.0425 b) Security Market Line Security Beta CAPM Return - 0 2% - 1 10% 1 1 10% 2 0.75 8% 3 1.3 12% CAPM Return = Risk Free Return + Beta(Market Premium)

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