3. On the following two sheets are regressions of the excess returns over the risk-free rate for Proctor and Gamble and Boston Scientific vis--vis the excess returns on the S&P 500 index. The S&P 500 index is our proxy for the market basket.

a) Does Proctor and Gamble stock add to or reduce the overall riskiness of the market portfolio? Explain why in context of the parameters of the CAPM.

b) Does Proctor and Gamble stock appear to be overvalued or undervalued or neither? Explain in terms of the parameters of the CAPM.

c) Use the estimated parameters to compute the return to equity demanded by Proctor and Gamble shareholders according to CAPM. Show calculations. Assume the risk-free rate was 2% and the return on the market portfolio is 5%. Use raw beta in your answer.

d) Answer questions a) through c) for Boston Scientific.

GRAB EquityBETA PG US Equity Data Relative Index Range SPX Index Historical Beta Local CCY Last Price 10/27/0010/15/10 OPeriod Weekly Linear 20 Beta + Non-Parametric Y PROCTER& GAMBLE CO/THE X = S&P 500 INDEX Y:0.439X+0.129 tem Raw BETA Adj BETA ALPHA(Intercept) R 2 (Correlation 2) Std Dev Of Error Std Error Of ALPHA Std Error Of BETA Number Of Points alue 0.439 0.626 0.129 0.194 2.420 0.106 0.039 10 -5 520 -10 -15 -20 Last Observation -20 -15 -10 -5 10 15 20 X SPX Index Australia 61 2 9777 8600 Brazil 5511 3048 4500 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000 right 2010 Bloomberg Finance L.P SN 153128 H260-4-2 21-0ct-10 13 29 01 Japan 81 3 3201 8900 Singapore 65 6212 1000 U.S. 1 212 318 2000 GRAB EquityBETA PG US Equity Data Relative Index Range SPX Index Historical Beta Local CCY Last Price 10/27/0010/15/10 OPeriod Weekly Linear 20 Beta + Non-Parametric Y PROCTER& GAMBLE CO/THE X = S&P 500 INDEX Y:0.439X+0.129 tem Raw BETA Adj BETA ALPHA(Intercept) R 2 (Correlation 2) Std Dev Of Error Std Error Of ALPHA Std Error Of BETA Number Of Points alue 0.439 0.626 0.129 0.194 2.420 0.106 0.039 10 -5 520 -10 -15 -20 Last Observation -20 -15 -10 -5 10 15 20 X SPX Index Australia 61 2 9777 8600 Brazil 5511 3048 4500 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000 right 2010 Bloomberg Finance L.P SN 153128 H260-4-2 21-0ct-10 13 29 01 Japan 81 3 3201 8900 Singapore 65 6212 1000 U.S. 1 212 318 2000