Mini Case THE BETA FOR COCA-COLA AMATIL LTD Julie Tran, a recent finance graduate, has just begun her job with the investment firm Macquarie Bank. Paul Heath, one of the firm's directors, has been talking to Julie about the firm's investment portfolio. 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 diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company currently holds is shares in Coca-Cola Amatil Ltd. Coca-Cola Amatil is the Australasia region's anchor bottler of The Coca Cola Company. It manufactures, distributes and markets carbonated soft drinks, still and mineral waters, fruit juices, coffee and other alcohol- free beverages. It is known for bottling and distributing the world-leading brands of Coca-Cola, Diet Coke, Coke Zero, Fanta, Sprite, Powerade, Glacau and Pump, as well as other trademark beverages of The Coca-Cola Company. The company has a division that manufactures premium beers from the SABMiller portfolio including Peroni Nastro Azzurro, Peroni Leggera, Grolsch, Pilsner Urquell, Miller Genuine Draft and Miller Chill. The Pacific Beverages joint venture also owns the Bluetongue premium beer brand. Macquarie Bank currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how share betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Julie to do the following assignments. QUESTIONS 1. Go to https://au.finance.yahoo.com and download the ending monthly share prices for Coca-Cola Amatil Ltd (ASX code CCL) for the last 60 months. Be sure to use the adjusted closing price to account for any share splits and dividend payments. Next, download the ending value of the S&P/ASX All Ordinaries Index over the same period. For the historical risk-free rate, go to the RBA website www.rba.gov.au and find the Treasury cash rate. Download this file. What are the monthly returns, average monthly returns and standard deviations for a Coca-Cola Amatil share, the cash rate interbank and the S&P/ASX All Ordinaries Index for this period? 2. Beta is often estimated by linear regression. A model often used is called the market model, which is: R: - Rp.= a + B, (RM-Ralter In this regression, R, is the return on the share and R is the risk-free rate for the same period; Rm is the return on a share market index such as the S&P/ASX All Ordinaries Index; a, is the regression intercept and p, is the slope (and the share's estimated beta). , represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, ,, 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 interpretation of the residuals in the regression? 3. Use the market model to estimate the beta for Coca-Cola Amatil using the last 60 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on Coca-Cola Amatil against the index and also show the fitted line. 4. Compare your beta for Coca-Cola Amati (ASX.code CCL) to the beta you find on https:// au finance.yahoo.com. How similar are they? Why might they be different? Mini Case THE BETA FOR COCA-COLA AMATIL LTD Julie Tran, a recent finance graduate, has just begun her job with the investment firm Macquarie Bank. Paul Heath, one of the firm's directors, has been talking to Julie about the firm's investment portfolio. 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 diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company currently holds is shares in Coca-Cola Amatil Ltd. Coca-Cola Amatil is the Australasia region's anchor bottler of The Coca Cola Company. It manufactures, distributes and markets carbonated soft drinks, still and mineral waters, fruit juices, coffee and other alcohol- free beverages. It is known for bottling and distributing the world-leading brands of Coca-Cola, Diet Coke, Coke Zero, Fanta, Sprite, Powerade, Glacau and Pump, as well as other trademark beverages of The Coca-Cola Company. The company has a division that manufactures premium beers from the SABMiller portfolio including Peroni Nastro Azzurro, Peroni Leggera, Grolsch, Pilsner Urquell, Miller Genuine Draft and Miller Chill. The Pacific Beverages joint venture also owns the Bluetongue premium beer brand. Macquarie Bank currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how share betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Julie to do the following assignments. QUESTIONS 1. Go to https://au.finance.yahoo.com and download the ending monthly share prices for Coca-Cola Amatil Ltd (ASX code CCL) for the last 60 months. Be sure to use the adjusted closing price to account for any share splits and dividend payments. Next, download the ending value of the S&P/ASX All Ordinaries Index over the same period. For the historical risk-free rate, go to the RBA website www.rba.gov.au and find the Treasury cash rate. Download this file. What are the monthly returns, average monthly returns and standard deviations for a Coca-Cola Amatil share, the cash rate interbank and the S&P/ASX All Ordinaries Index for this period? 2. Beta is often estimated by linear regression. A model often used is called the market model, which is: R: - Rp.= a + B, (RM-Ralter In this regression, R, is the return on the share and R is the risk-free rate for the same period; Rm is the return on a share market index such as the S&P/ASX All Ordinaries Index; a, is the regression intercept and p, is the slope (and the share's estimated beta). , represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, ,, 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 interpretation of the residuals in the regression? 3. Use the market model to estimate the beta for Coca-Cola Amatil using the last 60 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on Coca-Cola Amatil against the index and also show the fitted line. 4. Compare your beta for Coca-Cola Amati (ASX.code CCL) to the beta you find on https:// au finance.yahoo.com. How similar are they? Why might they be different