Build A Model Using The Data Given To Calculate Annual Retur ✓ Solved

Build A Modela Use The Data Given To Calculate Annual Returns For Go

Construct a financial model using the provided data to calculate the annual returns for Goodman Industries, Landry Incorporated, and the Market Index over a five-year period. Then, determine the average returns for each over the specified timeframe. Additionally, compute the standard deviation of these returns, create scatter diagrams to visualize the relationship between stock returns and market returns, estimate the companies' betas through regression analysis, and evaluate their expected returns based on the Capital Asset Pricing Model (CAPM). Finally, analyze the impact of combining stocks into portfolios by calculating the portfolio beta and required return, including scenarios with multiple stock weights and a specific stock investment.

Paper For Above Instructions

Introduction

The process of evaluating the performance and risk of stocks involves calculating returns, assessing variability, and understanding systematic risk through beta coefficients. This paper applies these principles to Goodman Industries, Landry Incorporated, and a Market Index, based on supplied historical data, to develop a comprehensive financial analysis that includes return calculations, statistical measures, regression analysis, and portfolio evaluation.

Data and Return Calculations

The initial step involves processing historical stock prices and dividends, as provided for the years, to compute annual returns. Return calculation follows this formula:

• Return = (Ending Price + Dividends - Beginning Price) / Beginning Price

For example, to calculate Goodman Industries' 2020 return, we use the 2020 and 2019 prices and dividends where available. Given data for 2020 include the beginning price (2019), ending price (2020), and the dividend received.

Data Summary and Calculation

Using these data points, we compute the annual returns for Goodman, Landry, and the Index for each year, then average the returns over the period.

Calculating the Returns

For instance, Goodman’s return for 2020 would be calculated as:

Return = (2020 Price + Dividend - 2019 Price) / 2019 Price

Perform similar calculations for each year and for the other assets to compile series of annual returns.

Standard Deviation of Returns

Once returns are calculated, we determine their variability using sample standard deviation, applying Excel’s STDEV function or an equivalent formula. This quantifies the risk associated with each asset, where higher standard deviation indicates greater return volatility.

Scatter Diagrams and Regression Analysis

To explore the relationship between stock returns and market returns, scatter diagrams are created with the market index returns on the horizontal (X) axis and individual stock returns on the vertical (Y) axis. Using Excel’s Chart Wizard, a scatter plot without connecting lines is generated, which visually reveals the correlation pattern.

Linear regression lines are fitted to these data points, and their slopes are estimated via Excel’s SLOPE function. These slopes serve as the beta coefficients, indicating the sensitivity of each stock’s returns to market movements.

Estimating Beta and Required Returns

Beta coefficients measure systematic risk. For Goodman and Landry, the beta estimates derived from regression are compared with the scatter diagram trends for consistency.

Using the Capital Asset Pricing Model (CAPM), the expected return for each company is calculated considering the risk-free rate (8.04%) and the market risk premium (6%):

Expected Return = Risk-Free Rate + Beta × Market Risk Premium

These computations provide insight into the compensation investors require for bearing systematic risk.

Portfolio Analysis

Constructing portfolios involves calculating combined beta and expected return based on weights assigned to assets. For example, a portfolio with 60% Goodman and 40% Landry has a beta equal to the weighted average of individual betas:

Portfolio Beta = (Weight_Goodman × Beta_Goodman) + (Weight_Landry × Beta_Landry)

and the required return is calculated using the same weighted approach with the CAPM formula.

Similarly, a diversified portfolio including additional stocks (A, B, C) with specified weights and betas further illustrates how portfolio risk and return are affected by asset selection and weighting strategies.

Conclusion

This comprehensive analysis demonstrates how to apply fundamental financial models and statistical tools to evaluate stocks and portfolios. Calculations of returns, standard deviations, regression-based betas, and portfolio metrics provide a robust framework for investment decision-making and risk assessment.

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