EVALUATION OF PORTFOLIO BETA AND THE REQUIRED RETURN ON STOCK
The tendency of a stock’s price to move up and down with the market is reflected in its beta coefficient. Therefore, beta is a measure of an investment’s market risk, and is a key element of the CAPM.
In this part of the project, you get financial information using Yahoo!Finance (found at http://finance.yahoo.com/ )
To find a company’s beta, enter the desired stock symbol and request a basic quote. Once you have the basic quote, select the “Key Statistics”. Scroll down this page to find the stock’s beta.
In your initial response to the topic you have to answer all 5 questions.
From Yahoo!Finance obtain a report on any two companies. The two companies are IBM and Hewlitt Packard.
1. What are the betas listed for these companies?
2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio?
3. If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Please show your work.
4. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s (www.finance.yahoo.com) -click on Market Data – Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. Please show your work.
5. Compare the required return on these stocks calculated using CAPM in question #4 against their historical return over the last 52 weeks, found in the Yahoo!Finance – Key Statistics. Is there a difference between these returns? Is this a problem? Why is there a difference?