solution

You recently downloaded (i.e. “pulled”) historical monthly returns for the last 5 years from the internet for FlyBoy stock (i.e. you pulled 60 months of returns).

You also computed the historical volatility of the monthly returns, and then converted the monthly volatility into an annual volatility. You computed an annualized volatility of returns of 42.4%.

In addition, you ran a market model regression and then computed the total risk, systematic risk and idiosyncratic risk of FlyBoy stock. From that you then computed the proportion of FlyBoy’s total risk that is comprised of systematic risk to be 73.3%.

Based on FlyBoy’s annualized volatility and its systematic risk relative to its total risk, what can you conclude about FlyBoy’s historical stock returns?

HINT:Review the discussions surrounding Table 4, and Figures 5 and 6.

In the Answer Box below, enter a value of 1 to 8 based on the choices below:

1. Both measures are in-line with the typical values one would observe for an individual stock.
2. Both measures are abnormally high relative to the typical values one would observe for an individual stock.
3. Both measures are abnormally low relative to the typical values one would observe for an individual stock.
4. The annualized volatility is abnormally high, and the ratio of systematic risk to total risk is abnormally low – relative to the typical values one would observe for an individual stock.
5. The annualized volatility is abnormally low, and the ratio of systematic risk to total risk is abnormally high – relative to the typical values one would observe for an individual stock.
6. The annualized volatility is in-line with the typical values one would observe for an individual stock, but the ratio of systematic risk tot total risk is abnormally high.
7. The annualized volatility is in-line with the typical values one would observe for an individual stock, but the ratio of systematic risk to total risk is abnormally low.
8. None of the above are correct.