MSc Finance; MSc Finance and Accounting
Practice Problems set #1:
Applying the Normal distribution table; Interpreting beta regression output
Dr. Maria Boutchkova Winter Semester 2011
Use the Normal distribution table at the end of this document to solve the two following problems.
Problem 1
Consider the asset classes in the table below. For each of them calculate:
A. the 95% confidence interval for the return you can expect
B. the probability with which you expect to make at least 5% return C. the probability that your return will be in the interval [-10%,10%]
1926-2005
Small company Shares Large-Company Shares Long-term corporate bonds Long-term government bonds Medium-term government bonds U.S. Treasury bills
Arithmetic
Mean 17.40% 12.30% 6.20% 5.80% 5.50% 3.80%
Risk Premium
13.60% 8.50% 2.40% 2.00% 1.70%
Standard Deviation 32.90% 20.20% 8.50% 9.20% 5.70% 3.10%
Problem 2
Consider the output from the regression of Ford Motor Co. returns on the S&P500: Over the period 1977-2010:
y?0.0049?1.3663x R2?0.2481; slope coef. st. error=0.1197 Over the period 2004-2010:
y?0.0128?2.4956x R2?0.2712; slope coef. st. error=0.4822
MN7032, Corporate Finance
University of Leicester, School of Management Dr. Maria Boutchkova
2010-2011
A. Calculate and interpret Jensen’s alpha over the two estimation periods given the following data on average yields on government bonds:
3-month Treasury bills 5-year Government bonds 30-year Government bonds
B. Calculate and interpret the 95% confidence interval of the two beta estimates C. Interpret the R2s of the two regressions
7-year average yield
1.55% 3.41% 4.83%
30-year average yield
4.02% 6.37% 7.26%
Page 2 of 3
MN7032, Corporate Finance
University of Leicester, School of Management Dr. Maria Boutchkova
2010-2011
Page 3 of 3