In the Capital Asset Pricing Model (CAPM) discussion, beta is identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would ideally like to know how the stock will move with the market in the future, but because we don't have a crystal ball we generally use historical data to estimate this relationship. As noted in the chapter, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can instead rely on reported betas from a variety of sources. These published sources make it easy to obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various published sources. For the following questions (except Q4 and 5), use Yahoo Finance. 1. Begin by taking a look at the historical performance of the overall stock market. If you want to see, for example, the performance of the S&P 500. How has the market performed over the past year? The past 5 years? The past 10 years? 2. Now let's take a closer look at the stocks of two companies: Apple (AAPL) and Procter & Gamble (PG). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1), and which of these companies would you expect to have a relatively low beta (less than 1)? 3. Select one of the two stocks listed in question. Find a chart that summarizes how the stock has done relative to the S&P 500 over the past years. Has the stock outperformed or underperformed the overall market during the past year? The past 5 years? 4. What is the firm's beta according to Yahoo Finance? Is it possible that you will find different beta from other financial websites? 5. Assume that the risk-free rate is 3% and that the market risk premium is 6%. What is the required return on the company's stock? (using the beta estimation from Yahoo Finance) In the Capital Asset Pricing Model (CAPM) discussion, beta is identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would ideally like to know how the stock will move with the market in the future, but because we don't have a crystal ball we generally use historical data to estimate this relationship. As noted in the chapter, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can instead rely on reported betas from a variety of sources. These published sources make it easy to obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various published sources. For the following questions (except Q4 and 5), use Yahoo Finance. 1. Begin by taking a look at the historical performance of the overall stock market. If you want to see, for example, the performance of the S&P 500. How has the market performed over the past year? The past 5 years? The past 10 years? 2. Now let's take a closer look at the stocks of two companies: Apple (AAPL) and Procter & Gamble (PG). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1), and which of these companies would you expect to have a relatively low beta (less than 1)? 3. Select one of the two stocks listed in question. Find a chart that summarizes how the stock has done relative to the S&P 500 over the past years. Has the stock outperformed or underperformed the overall market during the past year? The past 5 years? 4. What is the firm's beta according to Yahoo Finance? Is it possible that you will find different beta from other financial websites? 5. Assume that the risk-free rate is 3% and that the market risk premium is 6%. What is the required return on the company's stock? (using the beta estimation from Yahoo Finance)
