Answer to Question (A)

The annual returns for Bartman, Reynolds, and the Market Index are given below. Return is
calculated using the following formula:

( Ending Price−Beginning Price )+ Dividend

Return=
Beginning Price

Average return is calculated by summing the total returns and dividing it by the number of years.

Bartman Industries
Yea Stock Average
Dividend Return
r Price return
2015 $25.25 2.5 23.06%
2014 $22.55 2.5 7.05%
2013 $23.40 1.54 -1.62%
9.86%
2012 $25.35 2.75 6.54%
2011 $26.38 1.766 14.28%
2010 $24.63 2.6  

Reynolds Incorporated

Yea Stock Average

Dividend Return
r Price return
2015 $63.75 2.5 1.45%
2014 $65.30 3.5 7.92%
3.63%
2013 $63.75 1.55 2.03%
2012 $64.00 2.65 6.64%

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 2011 $62.50 1.3 0.08%
2010 $63.75 2.6  

Market Index

Market Index Average

Year Return
(Includes Divs.) return
2015 10740.98 43.51%
2014 7484.7 -7.52%
2013 8092.98 10.20%
16.19%
2012 7344.03 10.87%
2011 6624.28 23.89%
2010 5347  

Answer to Question (B)

The standard deviation of the returns for Bartman, Reynolds, and the Market Index are given
below. Standard deviation is calculated using the following formula:

Where,
SD=
√ ∑
❑
❑( x i−x)2
n−1

x i denotes the individual returns,

x denotes the average return,

n denotes the number of years.
Yea Stock Average Standard
Dividend Return
r Price return Deviation
2015 $25.25 2.5 23.06% 9.86% 9.28%

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2014 $22.55 2.5 7.05%
2013 $23.40 1.54 -1.62%
2012 $25.35 2.75 6.54%
2011 $26.38 1.766 14.28%
2010 $24.63 2.6  

Bartman Industries

Reynolds Incorporated

Yea Stock Average Standard

Dividend Return
r Price return Deviation
2015 $63.75 2.5 1.45%
2014 $65.30 3.5 7.92%
2013 $63.75 1.55 2.03%
3.63% 3.44%
2012 $64 2.65 6.64%
2011 $62.50 1.3 0.08%
2010 $63.75 2.6  

Market Index

Yea Market Index Average Standard

Return
r (Includes Divs.) return deviation
2015 10740.98 43.51% 16.19% 18.92%
2014 7484.7 -7.52%

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 2013 8092.98 10.20%
2012 7344.03 10.87%
2011 6624.28 23.89%
2010 5347  

Standard deviation of return is used as a measure of risk. The higher its value, the higher the
volatility of return of a particular asset and vice versa. From the data above, we can see that
Bartman Industries has higher volatility than Reynolds Incorporated.

Answer to Question (C)

The coefficients of variation for Bartman, Reynolds, and the Market Index are given below.
Coefficient of variation is calculated using the following formula:

Standard Deviation
Coefficient of Variation=
Average Return

Bartman Industries

Yea Stock Average Standard Coefficient of

Dividend Return
r Price return Deviation variance
2015 $25.25 2.5 23.06%
2014 $22.55 2.5 7.05%
2013 $23.40 1.54 -1.62%
9.86% 9.28% 0.940836477
2012 $25.35 2.75 6.54%
2011 $26.38 1.766 14.28%
2010 $24.63 2.6  

For Bartman Industries, CV is 0.940836477. For 1 unit return, risk is 0.940836477 unit.
Reynolds Incorporated

Stock Average Standard Coefficient of

Year Dividend Return
Price return Deviation variance
2015 $63.75 2.5 1.45%
2014 $65.30 3.5 7.92% 3.63% 3.44% 0.94935202
2013 $63.75 1.55 2.03%

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2012 $64 2.65 6.64%
2011 $62.50 1.3 0.08%
2010 $63.75 2.6  

For Reynold Incorporated, CV is 0.94935202. For 1 unit return, risk is 0.94935202.

Market Index

Market Index Average Standard Coefficient of

Year Return
(Includes Divs.) return deviation variation
2015 10740.98 43.51%
2014 7484.7 -7.52%
2013 8092.98 10.20%
16.19% 18.92% 1.168664874
2012 7344.03 10.87%
2011 6624.28 23.89%
2010 5347  

For market index, CV is 1.168664874. For 1 unit return, risk is 1.168664874.

Coefficient of variation is a measure used to assess the total risk per unit of return of an
investment. From the data above, we can see that Bartman Industries has a slightly lower total
risk per unit of return compared to Reynolds Incorporated.

Answer to Question (D)

The scatter diagram graphs showing Bartman’s and Reynolds’s returns on the vertical axis and
the Market Index’s returns on the horizontal axis are given below.

Bartman Industries

Bartman Industries Return

Market Return (%) (%)
43.51 23.06
-7.52 7.05
10.2 -1.62

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 10.87 6.54
23.89 14.28

Beta = 0.3825

Beta measures the volatility, or systematic risk, of an individual stock in comparison to the
unsystematic risk of the entire market. It is represented by the slope of the line through a
regression of data points from an individual stock's returns against those of the market. Here, we
can see that the beta for Bartman Industries is 0.3825. It means 1% change in market return will
lead to a 0.3825% change in stock return.

Reynolds Incorporated

Reynolds Incorporated Return

Market Return (%) (%)
43.51 1.45
-7.52 7.92
10.2 2.03
10.87 6.64
23.89 0.08

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 Beta = -0.1362

From the data above, we can see that the systematic risk for the stock of Reynolds Incorporated
is -0.1362. It means 1% change in market return will lead to a negative 0.1362% change in stock
return.

Answer to Question (E)

The regression data for the returns of Bartman and Reynolds against the Market Index’s returns
are given below.

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 Bartman Industries

Regression Statistics
Multiple R 0.779814849
R Square 0.608111199
Adjusted R Square 0.477481598
Standard Error 6.708202029
Observations 5

ANOVA
  df SS MS F
Regression 1 209.4853566 209.4853566 4.655232789
Residual 3 134.9999234 44.99997446
Total 4 344.48528    

  Coefficients Standard Error t Stat P-value

Intercept 3.669738422 4.151718867 0.883908217 0.441840968
X Variable 1 0.382474464 0.177268571 2.157598848 0.119846383

RESIDUAL
OUTPUT

Observation Predicted Y Residuals

1 20.31120237 2.748797633
2 0.79353045 6.25646955
3 7.570977958 -9.190977958
4 7.82723585 -1.28723585
5 12.80705338 1.472946624

From the data above, we can see that the betas are consistent across both the regression method
and the scatter diagram (0.3825; rounded to 4 decimal places).

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 Reynolds Incorporated

Regression Statistics
Multiple R 0.748775453
R Square 0.560664678
Adjusted R Square 0.414219571
Standard Error 2.634086372
Observations 5

ANOVA
  df SS MS F
Regression 1 26.56368695 26.56368695 3.828497171
Residual 3 20.81523305 6.938411017
Total 4 47.37892    

Standard
  Coefficients Error t Stat P-value
Intercept 5.829040829 1.630241016 3.575569976 0.037403789
X Variable 1 -0.136197704 0.069607434 -1.956654587 0.145325969

RESIDUAL
OUTPUT

Observation Predicted Y Residuals

1 -0.096921275 1.546921275
2 6.853247564 1.066752436
3 4.439824247 -2.409824247
4 4.348571786 2.291428214
5 2.575277679 -2.495277679

From the data above, we can see that the betas are consistent across both the regression method
and the scatter diagram (-0.1362; rounded to 4 decimal places).

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 Answer to Question (F)

Risk free rate, R f = 6.04%

Market risk premium, Rm −Rf = 5%

Expected return on the market:
Rm = 6.04% + 5%

= 11.04%

Bartman Industries

Required rate of return:

K e =R f +(R m−R f ) β

= 6.04% + 5% x 0.3825
= 7.9525%
≈ 7.953%

Reynolds Incorporated

Required rate of return:

K e =R f +(R m−R f ) β

= 6.04% + 5% x (0.1362)
= 5.359%

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 Answer to Question (G)

Portfolio beta,
β p = 0.5 x 0.3825 + 0.5 x (0.1362)

= 0.12315
≈ 0.123
Portfolio return,
K e p = 0.5 x 0.79525% + 0.5 x 5.359%

= 6.65575%
≈ 6.656%
Answer to Question (H)

Portfolio beta,
β p = 0.25 x 0.3825 + 0.15 x 0.769 + 0.4 x 0.985 + 0.2 x 1.423

= 0.889575
≈ 0.89
Portfolio required return,
K e p = 6.04% + 5% x 0.889575

= 10.488%

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