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 "Statistics". Scroll down this page to find the stock's beta

From Yahoo!Finance obtain a report on any two companies. TARGET and SEAR CORPORATION HOLDINGS

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? Please how your work.

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 how your work.

4. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on both stock. Note that you will need the risk-free rate and the market return.

a) To get the current yield on 10-year Treasury securities go to Finance!Yahoos at 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.

b) To get the market return go to www.money.cnn.com , Click on Market, then click on S&P 500.You will use 52-weeks change for S&P500 listed as Year-to-Date percentage change.

c) Calculate the required return on both stock using the Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work.

5. Find on the Internet the 52-weeks change of the stock price. Compare the required return on these stocks calculated using CAPM against their historical return over the last 52 weeks. Is there a difference between these returns? Are these stock overvalued, undervalued, or properly valued? Why? In accordance with your founding, is it reasonable for the investor to buy any of these stocks? Explain your answers.