Question
One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several
One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500. As a result, many financial analysts prefer to use another measure of risk referred to as beta.Betas for individual stocks are determined by simple linearregression. The dependent variable is the total return for the stockand the independent variable is the total return for the stockmarket. For this case problem we will use the S&P 500 index asthe measure of the total return for the stock market, and anestimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation . The data contained in the WEBfile named Beta provides the total return (capital appreciation plus dividends) over 36 months for eight widely traded common stocks and the S&P 500.The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is more volatile than the market, and betas less than 1 indicate that the stock isless volatile than the market. For instance, if a stock has a beta of 1.4, it is 40%morevolatile than the market, and if a stock has a beta of .4, it is 60%lessvolatile than the market.
You have been assigned to analyze the risk characteristics of these stocks. Prepare a report that includes but is not limited to the following items.
(a) | Microsoft | Exxon Mobil | Caterpillar | Johnson & Johnson | McDonald's | Sandisk | Qualcomm | Procter & Gamble | S&P 500 |
n | |||||||||
Mean | |||||||||
Std Dev | |||||||||
Min | |||||||||
Median | |||||||||
Max | |||||||||
(b) | Microsoft | Exxon Mobil | Caterpillar | Johnson & Johnson | McDonald's | Sandisk | Qualcomm | Procter & Gamble | S&P 500 |
Beta | |||||||||
(c) | Microsoft | Exxon Mobil | Caterpillar | Johnson & Johnson | McDonald's | Sandisk | Qualcomm | Procter & Gamble | S&P 500 |
r2 | |||||||||
Month | Microsoft | Exxon Mobil | Caterpillar | Johnson & Johnson | McDonald's | Sandisk | Qualcomm | Procter & Gamble | S&P 500 |
Jan-03 | -0.08201 | -0.02261 | -0.0304 | -0.00186 | -0.11443 | -0.24867 | 0.0349 | 0.000465 | -0.027415 |
Feb-03 | 0.00211 | 0.00293 | 0.06867 | -0.01781 | -0.04424 | 0.09363 | -0.08178 | -0.043356 | -0.017004 |
Mar-03 | 0.02152 | 0.02734 | 0.04681 | 0.10334 | 0.06245 | 0.00839 | 0.04251 | 0.087833 | 0.008358 |
Apr-03 | 0.05576 | 0.00715 | 0.07622 | -0.02609 | 0.18257 | 0.43876 | -0.11444 | 0.013588 | 0.081044 |
May-03 | -0.03717 | 0.04119 | -0.00856 | -0.03141 | 0.09532 | 0.50165 | 0.05395 | 0.021925 | 0.050899 |
Jun-03 | 0.04185 | -0.01346 | 0.06731 | -0.04876 | 0.17779 | 0.1164 | 0.07124 | -0.028752 | 0.011322 |
Jul-03 | 0.03003 | -0.00919 | 0.21847 | 0.00174 | 0.04306 | 0.39734 | 0.04285 | -0.009587 | 0.016224 |
Aug-03 | 0.00417 | 0.06661 | 0.06462 | -0.03804 | -0.02564 | 0.06633 | 0.10459 | -0.006601 | 0.017873 |
Sep-03 | 0.04827 | -0.02918 | -0.04163 | -0.00121 | 0.04996 | 0.05409 | 0.00823 | 0.063352 | -0.011944 |
Oct-03 | -0.05396 | -0.00055 | 0.06987 | 0.01636 | 0.06202 | 0.26491 | 0.13967 | 0.063833 | 0.054962 |
Nov-03 | -0.01645 | -0.00355 | 0.0378 | -0.0157 | 0.0412 | 0.00273 | -0.06043 | -0.020857 | 0.007129 |
Dec-03 | 0.06457 | 0.1326 | 0.09165 | 0.04787 | -0.03121 | -0.24276 | 0.21055 | 0.037822 | 0.050765 |
Jan-04 | 0.01023 | -0.00512 | -0.05444 | 0.03407 | 0.03665 | -0.11275 | 0.08678 | 0.01657 | 0.017276 |
Feb-04 | -0.04051 | 0.03996 | -0.03046 | 0.01367 | 0.09946 | -0.06372 | 0.07763 | 0.014147 | 0.012209 |
Mar-04 | -0.06031 | -0.01375 | 0.04383 | -0.05917 | 0.00954 | 0.11566 | 0.05072 | 0.02312 | -0.016359 |
Apr-04 | 0.04813 | 0.02308 | -0.01227 | 0.06526 | -0.0469 | -0.18371 | -0.05778 | 0.013063 | -0.016791 |
May-04 | 0.00383 | 0.0228 | -0.03062 | 0.03637 | -0.03048 | 0.06479 | 0.07541 | 0.019574 | 0.012083 |
Jun-04 | 0.08883 | 0.02682 | 0.05428 | -0.00018 | -0.01515 | -0.12008 | 0.08812 | 0.009831 | 0.017989 |
Jul-04 | -0.00245 | 0.04256 | -0.06974 | -0.00772 | 0.05769 | 0.12125 | -0.05166 | -0.037472 | -0.034291 |
Aug-04 | -0.03896 | 0.00151 | -0.01075 | 0.05636 | -0.01745 | -0.03988 | 0.10157 | 0.07325 | 0.002287 |
Sep-04 | 0.01282 | 0.04837 | 0.1066 | -0.03046 | 0.03738 | 0.24711 | 0.02602 | -0.033053 | 0.009364 |
Oct-04 | 0.01157 | 0.01842 | 0.00622 | 0.03639 | 0.03996 | -0.28331 | 0.06557 | -0.049704 | 0.014014 |
Nov-04 | 0.06864 | 0.04673 | 0.1367 | 0.03811 | 0.07341 | 0.08194 | 0.00048 | 0.044939 | 0.038595 |
Dec-04 | -0.00336 | 0.0002 | 0.0651 | 0.05139 | 0.04294 | 0.10585 | 0.02042 | 0.029918 | 0.032458 |
Jan-05 | -0.01647 | 0.00663 | -0.08204 | 0.02018 | 0.01029 | -0.01081 | -0.1217 | -0.029049 | -0.02529 |
Feb-05 | -0.03957 | 0.23217 | 0.06678 | 0.01832 | 0.0213 | 0.08826 | -0.03008 | -0.00263 | 0.018903 |
Mar-05 | -0.03935 | -0.0586 | -0.03798 | 0.02378 | -0.05865 | 0.03423 | 0.01609 | -0.001695 | -0.019118 |
Apr-05 | 0.04675 | -0.04312 | -0.03259 | 0.02189 | -0.05877 | -0.14748 | -0.0475 | 0.026981 | -0.020109 |
May-05 | 0.02292 | -0.00947 | 0.06882 | -0.01749 | 0.05561 | 0.09578 | 0.07079 | 0.018467 | 0.029952 |
Jun-05 | -0.03721 | 0.0226 | 0.01275 | -0.0313 | -0.1031 | -0.08625 | -0.1143 | -0.043518 | -0.000143 |
Jul-05 | 0.031 | 0.02227 | 0.1365 | -0.016 | 0.12324 | 0.4252 | 0.196 | 0.059905 | 0.035968 |
Aug-05 | 0.07224 | 0.02451 | 0.02931 | -0.00375 | 0.04107 | 0.14814 | 0.00811 | -0.002696 | -0.011222 |
Sep-05 | -0.06026 | 0.06077 | 0.05875 | -0.00174 | 0.03205 | 0.24234 | 0.12692 | 0.071738 | 0.006949 |
Oct-05 | -0.00117 | -0.11646 | -0.1006 | -0.01043 | -0.05643 | 0.22056 | -0.11151 | -0.053649 | -0.017741 |
Nov-05 | 0.08016 | 0.03883 | 0.09869 | -0.00862 | 0.0924 | -0.13281 | 0.14361 | 0.021432 | 0.035186 |
Dec-05 | -0.05527 | -0.03205 | -0.00017 | -0.02672 | -0.00384 | 0.23032 | -0.05058 | 0.012065 | -0.000952 |
- Compute descriptive statistics for each stock and the S&P 500. Comment on your results. Which stocks are the most volatile?
Calculate and paste the necessary values for the below
- Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in a down market?
- Comment on how much of the return for the individual stocks is explained by the market.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Analysis of the Risk Characteristics of Stocks Using Monthly Data Lets conduct the analysis following the given steps 1 Descriptive Statistics To comp...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started