CHAPTER CASE The Beta for FLIR Systems finance graduate, has just begun ent firm of Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking oey Moss, a recent his job with the investm commercial products that require minute temperature difference measurements, recreational marine usage and firefighting. to Joey about the firm's investment portfolio. Covili and Wyatt currently uses a commercial data ut its positions. Because of methods disclose how stock betas and As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversi- fled portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company currently holds is stock in FLIR Systems, Inc. (FLIR). FLIR Systems designs, manufactures, and markets thermal imaging and infrared camera systems. Although better known for its military applications, the vendor for information abo this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its proprietary, and it will not other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be le sive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the fol- company has divisions that design products for other lowing assignments applications such as automotive night vision QUESTIONS 1. Go to finance yahoo.com and download the ending monthly stock prices for FLIR Systems (FLIR) for the last 60 months. Be sure to use the adjusted closing price to account for any stock splits and dividend payments. Next, download the ending value of the S&P 500 index over the same period. For the his torical risk-free rate, go to the St. Louis Federal Reserve website (www.stlouisfed.org) and find the three-month Treasury bill constant maturity rate Download this file. What are the monthly returns average monthly returns, and standard deviations for FLIR Systems stock, the three-month Treasury bill, and the S&P 500 for this period? Beta is often estimated by linear regression. A model often used is called the market model, which is: the return on a stock market index such as the S&P 500 index, is the regression intercept, and , is the slope (and the stock's estimated beta). e, represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, a, is often called Jensen's alpha. What does it measure? If an asset has a positive Jensen's alpha, where would it plot with respect to the SML? What is the financial in terpretation of the residuals in the regression? 3. Use the market model to estimate the beta for FLIR Systems using the last 60 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on FLIR Systems against the index and also show the fit- ted line 2. 4. In this regression, R, is the return on the stock and Rft is the risk-free rate for the same period. RM Compare your beta for FLIR Systems to the beta you find on finance.yahoo.com. How similar are they? Why might they be different? CHAPTER CASE The Beta for FLIR Systems finance graduate, has just begun ent firm of Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking oey Moss, a recent his job with the investm commercial products that require minute temperature difference measurements, recreational marine usage and firefighting. to Joey about the firm's investment portfolio. Covili and Wyatt currently uses a commercial data ut its positions. Because of methods disclose how stock betas and As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversi- fled portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company currently holds is stock in FLIR Systems, Inc. (FLIR). FLIR Systems designs, manufactures, and markets thermal imaging and infrared camera systems. Although better known for its military applications, the vendor for information abo this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its proprietary, and it will not other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be le sive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the fol- company has divisions that design products for other lowing assignments applications such as automotive night vision QUESTIONS 1. Go to finance yahoo.com and download the ending monthly stock prices for FLIR Systems (FLIR) for the last 60 months. Be sure to use the adjusted closing price to account for any stock splits and dividend payments. Next, download the ending value of the S&P 500 index over the same period. For the his torical risk-free rate, go to the St. Louis Federal Reserve website (www.stlouisfed.org) and find the three-month Treasury bill constant maturity rate Download this file. What are the monthly returns average monthly returns, and standard deviations for FLIR Systems stock, the three-month Treasury bill, and the S&P 500 for this period? Beta is often estimated by linear regression. A model often used is called the market model, which is: the return on a stock market index such as the S&P 500 index, is the regression intercept, and , is the slope (and the stock's estimated beta). e, represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, a, is often called Jensen's alpha. What does it measure? If an asset has a positive Jensen's alpha, where would it plot with respect to the SML? What is the financial in terpretation of the residuals in the regression? 3. Use the market model to estimate the beta for FLIR Systems using the last 60 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on FLIR Systems against the index and also show the fit- ted line 2. 4. In this regression, R, is the return on the stock and Rft is the risk-free rate for the same period. RM Compare your beta for FLIR Systems to the beta you find on finance.yahoo.com. How similar are they? Why might they be different
