The following table shows estimates of the risk of two well known Canadian stocks:
|
Standard Deviation, % |
R2 |
Beta |
Standard Error of Beta |
|
|
Toronto Dominion Bank |
25 |
.25 |
.82 |
.18 |
|
Canadian Pacific |
28 |
.30 |
1.04 |
.20 |
a. What proportion of each stock’s risk was market risk, and what proportion was specific risk?
b. What is the variance of Toronto Dominion? What is the specific variance?
c. What is the confidence interval on Canadian Pacific’s beta?
d. If the CAPM is correct, what is the expected return on Toronto Dominion? Assume a risk free interest rate of 5% and an expected market return of 12%.
e. Suppose that next year the market provides a zero return. Knowing this, what return would you expect from Toronto Dominion?