The returns of URI are listed below, along with the returns on “the market”: Year URI Market 1 -14% -7% 2 16% 9% 3 22% 16% 4 7% 6% 5 -2% 5% If the risk-free rate is 4.1 percent, what is the required return on URI’s common equity? Assume the market is in equilibrium. Can anyone help me to solve this… somehow i dont understand what is asked ?
It is asking cost of equity Using CAPM, I am getting 11.2% with beta as Cov(URI to mkt)/Variance(mkt)… is that right? But I doubt if it can be done in 2 minutes that way. Maybe someone has a shorter method
can you show me how did you get those nos. I am not able to get it.
i get 6.33% you need to calculate beta which is cov(uri,mkt) divided by variance of the market. i get covariance at 91.56 and variance of the mkt at 69.7 for beta of 1.313 so using capm - 4.1 + 1.313(5.8-4.1) = 6.33 i tend to mess up these kinda problems, so please give us a correct answer.
Mine is close to jut111. I get the Cov .0566/5 = .0113 Beta = .0113/.0099=1.13 So k = 4.1 + 1.13(5.8-4.1) = 6.02.
Hi jut111, Yea i got the same ans as yours… Beta 1.313 cost of equity as 6.3
Pls let me know your covariance and mkt std. Dont forget to use the formula Beta = Cov/std dev mkt^2. This may account for our differences.
using 2nd data on your TI BA Calc enter the points as x, y coordinates then do 2nd stat and keep hitting the down arrow. you get xbar=5.8 sx=14.32 ybar=5.8 sy=8.3486 r=0.957 (Correlation) now cov(x,y) = r sx sy = 114.412 beta = cov (x,y) / sy^2 = 1.6415 r = 4.1 + 1.6415 ( 5.8 - 4.1) = 6.9%
thanks cpk 123. i was not aware of this function on my TI BA calci. for this particular calcuation i think the xbar = 5.8 ybar= 5.8 SDx is 12.81 and SDy is 7.47, r (correlation)= 0.96. cov xy = .96*12.81*7.47 = 91.86 Beta = 91.86 / 55.8 = 1.646 r = 4.1 + 1.646 (5.8 - 4.1) = 6.89% Almost the same ans.
This seems handy, I wonder if I can use this for other covariance questions?
is there a way to calc COV when giving the prob of each return of a portfolio? For example Stock A 40% prob of getting a 5% return 60% prob of getting a 10% return Stock B 40% prob of getting a 7% return 60% prob of getting a 4% return Calc Covariance. can you calc do that?
i guess the formula for beta is beta x= cov (x,y) / var(y) and not sy^2 so i am getting beta as 1.31
sy^2 and var are one in the same. as for the weighted covariance Q, you’re stuck doing that the long way i think. finance08, can we get a confirmation on the answer here?
i dont have answeres with me…