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Part A: The purpose of our report is to review the risk and return characteristics of three Canadian companies: BCE, National Bank and Sleeman. Our analysis assumes that 3-month Canadian Government T-bills are a risk free investment. Also, the market return of our analysis is the total return of the TSX composite index over the relevant periods. Thus, our market return figures include the effects of dividends. Furthermore, the total return of each stock also takes into account the effect of dividends. The two periods our analysis focuses on are: The 54 month period beginning April 1998 and ending October 2002. The 104 week period beginning September 29, 2000 and ending September 27, 2002 The location of the relevant raw data is: Appendix A – National Bank’s raw share price data. Appendix B – BCE’s raw share price data. Appendix C – Sleeman’s raw share price data. Appendix D – Summarized weekly returns (for period to period, the risk premium and the holding period) for government of Canada 3-month T-bills, the TSX, Sleeman, BCE and National Bank. Appendix E – Summarized monthly returns (for period to period, the risk premium and the holding period) for government of Canada 3-month T-bills, the TSX, Sleeman, BCE and National Bank. At the very back of the assignment, the raw data that was derived from the Bloomberg source is included. The following discussion reviews the results of our analysis and any relevant issues. Part B: 4. Is the annual return of your stock the same or different than that predicted by its beta? If they are different, why are they different? Weekly E(r) = rfree + β(MRP) rfree = 3.55% (refer to appendix ) MRP = -26.41% (refer to appendix) National Bank Expected E(r) = 3.55% + 0.022668388(-26.41%) E(r) = 2.95% Actual E(r) = 16.71% Difference: 13.76% BCE Expected E(r) = 3.55% + 0.237288328081457(-26.41%) E(r) = -2.72% Actual E(r) = -3.67% Difference: -0.95% Sleeman’s Expected E(r) = 3.55% + -0.0469232938188208(-26.41%) E(r) = 4.79% Actual E(r) = 31.1% Difference: 26.31% Monthly E(r) = rfree + β(MRP) rfree = 4.31% (refer to appendix ) MRP = -5.44% (refer to appendix) National Bank Expected E(r) = 4.31% + -0.0262185269771839(-5.44%) E(r) = 3.83% Actual E(r) = 6.83% Difference: 3% BCE Expected E(r) = 4.31% + 0.76242611378215(-5.44%) E(r) = 0.16% Actual E(r) = 26.84% Difference: 26.68% Sleeman’s Expected E(r) = 4.31% + 0.086689287269669(-5.44%) E(r) = 4.45% Actual E(r) = 15.39% Difference: 10.94% NA BCE ALE Weekly Monthly Weekly Monthly Weekly Monthly Actual 16.71% 6.83% -3.67% 26.84% 31.10% 15.39% Expected 2.95% 3.83% -2.72% 0.16% 4.79% 4.45% Difference 13.76% 3.00% -0.95% 26.68% 26.31% 10.94% Overall, the actual performance is quite different from the predicted rate of return obtained using CAPM.
Approximate Word count = 1484
Approximate Pages = 5.9
(250 words per page double spaced)
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